(1) Profit is an opinion, Cash is a fact

Profit is just an opinion, cash is a fact. - one of favorite words of Mr. Tamotsu Iba, first CFO of Sony Corporation.

Although profits vary depending on the application of accounting standards, cash flow cannot be cheated. Because it shows how much money in and how much it went out. According to Mr. Iba, "Sony has been working on the consolidated management over a long time, and also started cash flow management relatively early among Japanese companies. There are different types of management indicators in the world and there is no absolute indicator. There is no end to the progress of management indicators. Operating income and operating cash flow show the matching movement in theory, but in fact, do not match because of the accounting standards. Accounting standards make it difficult to grasp the true profit.

Why do not match, you can be obtained useful information just to analyze it. For example, the stock does not affect the accounting of profits no matter how stacked up. On the contrary, even uncollected accounts receivable will get on profits. By thoroughly implementing cash flow management that excludes these "opinions", inventories at the end of September were able to be compressed down to 40 days
(source: Quotations DB: leaders of Quotations)

(2) Increasing surplus bankruptcy

According to Teikoku Databank, the bankruptcy case of the listed company in the 2008 fiscal year when there was a Lehman shock became the worst after the war with 45 affairs, of which 21 were caused by insolvency due to liquidity problems.

On an account book, insolvency due to liquidity problems is being unable to continue as a company but going bankrupt by shortage of hand capital, although profits have come out. Four are raised as a big cause.

1)Excessive capital investment

When a debt occurs especially on the occasion of the purchase of land and equipment, it will be in the state where sales and profits do not catch up with payment.

2)Aggravation of raising funds

The cash outflow (cash out) for purchase and payment greatly exceeds the accounts receivable collection (cash in), the cash on hand is exhausted, and there is a disadvantage.

3)Insufficient working capital

On the profit and loss statement, accounts receivable that occurred during sales constitute profits, but since we have not received them as cash, in fact there is no increase in funds.

The working capital is briefly expressed as follows.

Working capital = accounts receivable + inventory - accounts payable

4)Problem of inventory control

If parts, raw material, or goods are bought in, on the balance sheet it will be appropriated as inventory. On the profit and loss statement, it seems that profits have come out with the increase of property. However, since it remains as inventory, it is not necessarily the increase in the profits by cash having increased.

It is said that the majority of bankrupted companies tend to carry over a large amount of inventory, excess inventory and the increase of slow-moving inventory. It is imperative to promote inventory dollar control and unit control from the management viewpoints.

Net income in the profit and loss statement does not represent all of the funds currently held by companies, but because of the fact that there are uncollected accounts receivable, there is a big difference between the amount of net cash on hand and net income.

Therefore, in order not to be in surplus bankruptcy, as well as manage the movement of goods in the balance sheet and income statement, it is important to manage the movement of funds in the Statement of Cash Flows (in particular operating cash flow).

According to the Nikkei Shimbun of September 25, 2017, more than half of the 544 companies that went bankrupt in 2016 through their investigation of Tokyo Shoko Research said they had recorded a surplus in the final settlement of account. When the company starts selling products and services, the business seems to be on track, but need to pay particular attention to the monthly cash flow until the business stabilizes. The cause of surplus bankruptcy is not just deterioration of cash flow due to delayed collection of accounts receivable. They have reported that excessive inventory and capital shortage will also result in fatalities.

It turns out that surplus bankruptcy closely relates to accounts receivable, accounts payable and inventory.

Therefore, as a method that does not become surplus bankruptcy, you can make a payment cycle faster, adopt a prepayment system, delay your company's payment, and so on.

As there is a word "cash flow management", it is important how much cash funds you have at hand for the company to survive. When analyzing a company, it is necessary to confirm not only the balance sheet and the profit and loss statement but also the cash flow statement.

(3) Increasing Accounting Fraud

The accounting fraud means to intentionally misrepresent financial statements in order to deceive users of financial statements, or to not record the amount to be posted or to make necessary disclosure.

In general, fraudulent accounting can be classified into the category of (1) illegal sales advancement / fictional accounting, (2) postponement and no record of expenses, (3) evaluation change of assets, fictitious recording, (4) evaluation change of liabilities,

These are done by (i) counterfeiting / alteration / tampering of accounting records and related documents, (ii) misstatement or exclusion in financial statements, (iii) inappropriate application of accounting standards, and so on.

Accrual factors of accounting fraud

Generally speaking, fraud is said to occur when three fraudulent risks, "Opportunity", "Motivation" and "Justification" occur, it is called the fraud triangle.

Next, I will introduce the main methods for fraud accounting.

-Accounts Receivable: Concealed Accrued Accounts Receivable

-Inventory: overestimate or fictitious inventory

-Fixed assets: Excessive valuation (not impaired)

-Loans: imaginary loans

-Accounts payable: Fictitious accounts payable

-Sales: inappropriate sales record, fictional sales, circular transactions

-Cost of sales: deferred expenses

Fraud is intentionally done to gain unjust or illegal interests. Therefore, in order to generate profits on accounting,

-Increase sales

-Reduce costs

They will do accounting processing incentive works in two directions.

It is to make sales that is not real, defer the cost, postpone the loss, and show good profit. As a psychology to work injustice, it may be that there is a feeling such as "It is painful now, even if I do wrong only now, the scraps will fit someday." However, companies are responsible for properly reporting and explaining corporate performance and financial condition through accounting, so the idea of "It will be OK even if you do wrong only for this term" does not apply.

Next I will introduce the outline of Kanebo and Toshiba whose accounting fraud amount exceeds 2,000 Oku yen.

1. The case of Kanebo’s accounting fraud

Kanebo was a historic prestigious company that led the Japanese economy with the textile business as a founder. In 2005, over the past five years, Kanebo's window dressing settlement was discovered with more than 2,000 Oku yen dressing accounting, the auditing firm ChuoAoyama Audit was suspended the audit work for 2 months by Financial Service Agency (FSA) in 2006. As a result, the auditing industry in Japan was forced to undergo major restructuring.

As...