Follow the cash, not just the profit: BSEC chief urges forensic scrutiny of financial statements
The numbers must tell the same story as the business, he says.
Evaluating a company's financial health must begin with its underlying economic reality rather than relying solely on reported figures, said Bangladesh Securities and Exchange Commission (BSEC) Chairman Masud Khan.
Presenting the keynote at an ICAB webinar titled "Practical Approach to Financial Statements Analysis" today (29 August), the regulator chief outlined a comprehensive framework for forensic financial reviews, warning that artificial profits inevitably leave balance-sheet footprints.
"The numbers must tell the same story as the business," Masud said during the online event hosted by the Institute of Chartered Accountants of Bangladesh (ICAB).
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He explained that questionable income generally accumulates somewhere on the balance sheet – manifesting as inflated receivables, overstated inventory, capitalised expenses in capital work-in-progress (CWIP), or unrecorded liabilities.
He highlighted common manipulation techniques used to inflate reported results, such as premature revenue recognition, omitted cost of goods sold (COGS), circular related-party transactions, and improper reversal of provisions. To uncover these distortions, analysts must test the physical reality of the business alongside standard ratio analyses.
"If sales rise 40% but inputs, machine hours, payroll, and freight remain unchanged, management must explain the divergence," Masud noted, cautioning against discrepancies between figures reported to banks, tax authorities, and audited financial statements.
Concluding his paper, the BSEC chief posed a fundamental diagnostic question for analysts and auditors: "If the reported profit is genuine, where did the cash go?"
He noted that persistent earnings growth without matching operating cash flows remains the ultimate red flag requiring deeper investigation.
The webinar commenced with a welcome address by ICAB President Sabbir Ahmed, while Asifur Rahman, Vice President of ICAB and Partner at Hussain Farhad & Co., delivered the concluding remarks.
