A Five Step Investment Approach
Define: Universe consists of the 500 largest capitalized US stocks
Analyze: Perform forensic accounting analysis on each stock
Grade: Each stock receives an overall grade of "A-F"
Avoid: Stocks graded "F" are avoided due to financial red flags
Invest: Remaining stocks comprise index with a tilt toward A-graded stocks
The Investment Merits Of Forensic Accounting
Forensic accounting, also referred to as financial statement analysis, uses publicly available financial reports to search for the “red flags” of aggressive accounting practices that some companies have been found to employ. Red flags often indicate underlying business problems and will usually end up reflected in the price of a company’s stock.
Types of red flags identified by forensic accounting may include:
Fictitious Revenue Accelerated Revenue Recognition Inventory Issues Unsustainable Margin Expansion Financial Ratio Adjustments