By Stanley W. Self
Full-Time Faculty, School of Business
Financial Fraud in Business Acquisition
As discussed in the related December article, “Precautions to Help Avoid Financial and Credit Card Fraud,” financial fraud takes many forms.
Some types are less obvious, and the effect on consumers is not directly apparent.
Depending upon the industry and complexity of an acquisition, a variety of frauds
Auditing standards require audits to be performed by professionals experienced in the industry. Understanding all aspects of a business operation is critical to an audit, due diligence, and financial fraud investigation.
Reading trade journals dedicated specifically to an industry may improve familiarity with standard terminology and procedures. Becoming acquainted with peers and networking can be invaluable methods for generating information.
Understanding metrics used to evaluate
Camouflage—Learning to Blend In
Although business attire is usually appropriate, a financial researcher may need to modify his or her appearance to be received positively in some situations. Wearing clothing that resembles a truck driver’s attire into a truck stop may offer more opportunity for open conversation than wearing the type of clothing that people might associate with the IRS.
Another effective tool is to allow information to flow freely without making the research objective obvious. Maintaining an informal demeanor may facilitate free-flowing information.
Understanding the metrics of each component of truck stop operations would be an essential first step for investigating financial accounting fraud in that environment. Financial analysis of industry standards applies to due diligence.
Cash and Receivables
One significant component of truck stop operations involves AR,
By analyzing each of many bank statements, a point of precise reconciliation was determined. Then, by progressive reconciliation through all periods up to the date of acquisition, a $53,000 discrepancy was discovered. Subsequent analysis revealed $53,000 had been posted to the cash accounts but had not been posted to the individual customer AR. That inflated the assets because the same $53,000 was reflected twice in current assets (once as cash, and again as an open AR).
To unravel the discrepancy, a search of all AR subsidiary accounts was necessary. Analysis proved that those amounts had been credited to cash sales. This finding corresponded to an unexplained increase in the profit margin for the period.
Financial statement analysis must assemble facts. Financial analysis is a critical component of the process of uncovering financial fraud. Equally important would be industry-specific knowledge. Interview skills were invaluable. But perhaps the most important tool for protecting financial
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Stanley Self is a full-time faculty member at Kaplan University. The views expressed in this article are solely those of the author and do not represent the view of Kaplan University.