Analysis Techniques Using Historical Financial Statements and Other Company Information
Chapter 2 discusses both the horizontal and vertical analysis techniques used to analyze financial statement information. As mentioned earlier, horizontal analysis measures the changes from period to period for each specific line item in the financial statements, permitting the financial forensic examiner to analyze the trends of the line items. Also discussed in Chapter 2 is the vertical analysis technique that allows a financial forensic examiner to investigate the relationship between accounts in the financial statements based on a common variable. Also termed common-sizing, this technique expresses the relationships of line items in the financial statements to a specific base item, such as total assets or total revenues. Sometimes it is much easier to begin a simple analysis of historical financial information that lets the financial forensic examiner determine possible links in financial statement manipulation and earnings before performing additional complex analytical techniques. The two methods discussed in this chapter provide the financial forensic examiner with two additional analytical techniques to add to the toolbox that are fairly simple, and also quite reliable in pointing to questionable irregularities in a company's set of financial statements before completing more complex analytical techniques and additional investigative work.
These two techniques are the Piotroski ...