One of the many hats safety professionals have to wear is that of accountant. If accounting makes your head spin, fear not. Here are some simple strategies you can use when checking the books to determine if your company is engaging in any questionable accounting or financial practices.

Strategy 1: Follow the Cash

Always follow the cash flow. Cash flow from operations measures the amount of cash that a company is generating from its business. You can find it on the statement of cash flows in quarterly reports (SEC 10-Q filings, if your company is publicly traded) and sometimes in earnings press releases.

The basic rule: Over time, increases in a company's cash flow from operations should roughly track increases in net income. If you notice an increase in net income and a simultaneous decline in cash from operations, it should raise a red flag. The same is true if cash from operations increases much more slowly than net income. These numbers might mean the company is selling products on credit without collecting cash from customers, selling off investments or other assets or padding its bottom line against reversals from restructuring reserves (more on this in the "honeypot" section below).

Strategy 2: Be On the Lookout for Overstuffed Warehouses

Check whether inventories are rising faster than sales. Sometimes the buildup in inventory is just temporary. For example, the company may simply be stocking up in preparation for a new product launch. But in most cases, when inventory grows much faster than sales, trouble looms on the horizon.

The reason is simple: When a company produces more than it sells, either demand has dried up or the company has been overly ambitious in forecasting demand. Either way, the unsold goods will have to get sold off eventually, probably at a discount. Or, the company might have to write off the value of the unsold goods and take a bite out of earnings.

Strategy 3: Keep an Eye on Accounts Receivable

Watch the accounts receivable balance, which measures the amount of bills a company has outstanding, and compare it to sales. Measure the growth in accounts receivable as a percentage of sales over time. If receivables are moving up much faster than sales, something may be amiss. Check the company's SEC10-Q filing for mentions of changes in customers' credit terms, as well as for any explanation by management as to why accounts receivable has jumped. (Look in the "Management's Discussion and Analysis" section for the latter, and in the accounting footnotes for the former.)

The reason that growth in receivables that outstrips growth in sales is a red flag is that companies may engage in questionable practices to keep their top line growing, especially if the company is publicly traded. After all, there are few things Wall Street loves more than growth.

One questionable practice is to loosen customers' credit terms to get them to buy more stuff. A fraudulent but, thankfully rarer, variation on this theme is to ship more products than customers actually order. Thus, even though the company has recorded a sale, the customer hasn't yet paid for the product. It's as if the company has extended credit for the unordered goods. And if those goods aren't paid for, the company's earnings will have to be adjusted.

Strategy 4: Look for the 'Honeypot'

See if the company has set up a "restructuring reserve." To check for this, read the footnotes to any earnings release or 10-Q. Companies create these reserves when they've taken a big charge and want to recover at least part of the charge later on. This reserve is known as a "honeypot" because the company can dip into it when operational results aren't looking so hot.

In practice, companies have every incentive to take one-time charges that are as whopping as possible because Wall Street usually views the charges as nonrecurring events, kind of like a hurricane. Down the road, the company can then pad a rocky quarter with a couple of cents per share in reversals from the huge charge. These reversals usually don't amount to a lot of money. But they may spell the difference between meeting and missing the all-powerful consensus earnings per share number.

Conclusion

You know the old expression. If it looks like a duck, walks like a duck and quacks like a duck, you likely got yourself a mallard on your hands. It's the same with the books. If something looks wrong, ask management for an explanation. If they can't provide one-at least a convincing one-trust your gut. Something's probably wrong.

TEST YOUR ACCOUNTING I.Q.

Have you got what it takes to be an accountant?

By Glenn Demby

As Mark notes, to implement a health and safety program, sometimes the safety professional has to get immersed in the books. Here's a neat little quiz to test your knowledge of accounting:

1. Which of the following is NOT a fixed asset?

 A. Machinery

 B. Vehicles

 C. Bank Balance

 D. Goodwill

2. The act of transferring information from the General Journal to the General Ledger is called:

 A. Posting

 B. Journalizing

 C. Transferring

 D. Writing Off

3. What does G.A.A.P. stand for?

 A. General Accounting and Asset Principles

 B. Generally Accepted Accounting Principles

 C. Generalized Accounting Analysis Principles

 D. General Accounting and Auditing Procedures

4. A person who lends money to another person is called a:

 A. Creditor

 B. Debtor

 C. Trustee

 D. Stakeholder

5. A document that lists a company's assets and liabilities is called a(n):

 A. Income Statement

 B. Form 10Q

 C. Form 10K

 D. Balance Sheet

6. A business's Current Ratio is its:

 A. Current liabilities divided by current assets

 B. Current assets divided by current liabilities

 C. Capital assets divided by current liabilities

 D. Long-term liabilities divided by current assets

7. Cash, accounts receivable, inventory and other assets that will likely be turned into cash are all examples of:

 A. Fixed Assets

 B. Current Assets

 C. Depreciable Assets

 D. Current Liabilities

8. Reduction in fixed assets over time from wear and tear is called:

 A. Asset Liquidation

 B. Drawing Down

 C. Off Balance Sheet Losses

 D. Depreciation

9. In which form of accounting are transactions recorded in the period they actually occur?

 A. Cash Basis Accounting

 B. Transaction Basis Accounting

 C. Accrual Basis Accounting

 D. Current Basis Accounting

10. The document that shows a company's sales (incoming revenues) and expenses over a set period of time is called a(n):

 A. Income Statement

 B. Form 10Q

 C. Form 10K

 D. Balance Sheet

ANSWERS

1. C
2. B
3. B
4. A
5. D
6. B
7. B
8. D
9. C
10. A

GRADE YOURSELF

9 or 10 correct: You're an accountant trapped in a safety professional's body

7 or 8 correct: You can hold your own at an accountant's cocktail party

5 or 6 correct: Curl up with a nice P&L on your next vacation

4 or less correct: You better let your spouse balance your checkbook