Proof of Cash: The Simple Test That Shows if Earnings Are Real
A proof of cash compares the cash in the books of a company with the cash that moves through its bank accounts. Wirecard reported EUR 1.9 billion that did not exist, and Satyam inflated its balances by about INR 5,040 crore. Both frauds sat in the line that most readers trust the most.
A proof of cash compares the cash in the books of a company with the cash that moves through its bank accounts. It links revenue and expenses to actual deposits and payments. If the two do not agree, the reported earnings need more examination. In June 2020, the auditor EY could not verify EUR 1.9 billion of cash at Wirecard, a German payments company. This cash was about one quarter of the balance sheet. Wirecard said that the cash was in trust accounts (CNBC, 2020). The central bank of the Philippines then said that the money never entered its financial system. Days later, Wirecard filed for insolvency. Its market value had been as high as EUR 24 billion. India had a similar case. In January 2009, B. Ramalinga Raju, the founder of Satyam Computer Services, wrote to the board. He said that the company had inflated its cash and bank balances by about INR 5,040 crore. In both cases, the fraud was in the cash line. Most readers trust this line the most.
Part of our Due Diligence series. For the full picture, see our due diligence services in India.
How a Proof of Cash Works
A proof of cash is a reconciliation with four columns for each month: opening bank balance, receipts, payments and closing bank balance. The analyst compares each column with the general ledger. Then the analyst links receipts to revenue and payments to expenses. For example, a company reports USD 10 million of revenue in a quarter. Customer receipts in the bank are only USD 7 million. If receivables did not increase by USD 3 million, the company must explain the difference. What this means: An audit opinion is not a proof of cash. An audit tests samples once a year. A proof of cash tests each month of the diligence period, and it starts from the bank, not from the books.
What the Test Finds
• Revenue without cash. Fictitious sales, round-trip transactions, or sales to related parties that never pay. • Cash that is not free. Balances in escrow or trust accounts, or balances that secure a loan. • Unrecorded liabilities. Payments to parties that the books do not show. • Cut-off problems. Revenue in one period with cash that arrives much later. • Personal expenses. Owner or related-party costs that the company pays.
How to Do It Correctly
• Get bank statements directly from the bank, or through secure read-only access. Do not rely only on copies from management. • Confirm all bank accounts, which include accounts in other countries and with payment processors. • Cover each month of the full QoE period. • Examine large, round or repeated transfers between group companies. • Compare cash conversion (operating cash flow divided by EBITDA) across all periods.
Where MARC Comes In
• Do a monthly proof of cash for the full diligence period, from bank data. • Link cash receipts to revenue and identify gaps that need explanation. • Identify restricted cash, related-party flows and transfers between group companies. Speak with MARC's advisory team to verify the cash behind your next acquisition.
FAQs
What is a proof of cash? It is a monthly reconciliation between the bank statements and the general ledger. It confirms that reported revenue and expenses agree with actual cash movements. Is a proof of cash part of an audit? Not usually. An audit tests samples once a year. A proof of cash in diligence tests each month and starts from bank data. What did Wirecard show about cash? Wirecard reported EUR 1.9 billion of cash in trust accounts that the auditor could not verify. The company filed for insolvency within days.
Key Takeaway
Revenue and EBITDA depend on accounting judgment. Cash in a bank account does not. A proof of cash costs little when compared with the deal size. It is the most direct test of earnings quality that a buyer can do.
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