COMPANY directors and shareholders have been advised to watch for five classic red flags that warn of management fraud.
US accounting academic Jere Francis provided the advice in the 64th CPA Australia/Melbourne University research lecture last month.
The red flags include unduly aggressive earnings targets and management compensation based on aggressive earnings targets.
Other red flags were an inability to generate operating cash flows while at the same time reporting large earnings growth, financial statements based on subjective estimates and significant related party transactions.
Professor Francis warned Australia to move cautiously in mandating new corporate governance requirements.
“The human greed and bad business decisions that led to the Enrons, WorldComs and HIHs cannot be regulated out of existence,” he said.
“The basic mechanisms for good governance are already in place and derive from a common law tradition and the evolution of strong investor protection.”
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