Sharp Spike in Days Sales Outstanding (DSO)
Receivables growth substantially outpaces revenue growth, causing DSO to increase rapidly over multiple quarters.
RED FLAG PROFILE & FORMULA
- Indicator: Sharp Spike in Days Sales Outstanding (DSO)
- Screening Formula:
DSO = (Accounts Receivable / Total Credit Sales) * 365 - Targeted Schemes: channel stuffing, fictitious revenue, side letters, consignment as sales, premature recognition.
- False Positive Context: Can occur legitimately during a major enterprise software transition to large government or enterprise clients with extended 90-day payment terms, or during severe supply chain disruptions.
MATHEMATICAL FORMULA & EXTRACTION METHOD
10-K COMPUTATION
Mathematical Formula
DSO = (Accounts Receivable / Total Credit Sales) * 365
How to Compute from Form 10-K
Extract Accounts Receivable from Balance Sheet (Item 8) and Revenues from Income Statement. Compute DSO for trailing four quarters and compare against 3-year historical average and industry peer medians.
False-Positive Boundaries & Legitimate Explanations
Can occur legitimately during a major enterprise software transition to large government or enterprise clients with extended 90-day payment terms, or during severe supply chain disruptions.
FRAUD SCHEMES DETECTED BY THIS INDICATOR
SCHEME CORRELATIONS CHANNEL STUFFING Click to view journal entries and debits/credits for this scheme. FICTITIOUS REVENUE Click to view journal entries and debits/credits for this scheme. SIDE LETTERS Click to view journal entries and debits/credits for this scheme. CONSIGNMENT AS SALES Click to view journal entries and debits/credits for this scheme. PREMATURE RECOGNITION Click to view journal entries and debits/credits for this scheme.
CASES WHERE THIS RED FLAG APPEARED BEFORE DISCOVERY
3 HISTORICAL CASES| Case Title | Jurisdiction | Primary Scheme | Action Date |
|---|---|---|---|
| Luckin Coffee: $300M Fabricated App Sales and Circular Cash Scheme | CN | fictitious revenue | 2022-09-20 |
| Bristol-Myers Squibb: $2B Channel Stuffing with Wholesaler Incentives | US | channel stuffing | 2006-09-20 |
| Diebold, Inc.: Bill-and-Hold and Factory Floor Premature Revenue Recognition | US | bill and hold | 2007-09-20 |