What are the warning signs of potential business fraud? Having done hundreds of accounting investigations involving various allegations of financial wrongdoing, our team has seen it all. Whether it’s a shareholder dispute or business sale that resulted in litigation, a divorce case, suspicion of financial statement fraud or employee embezzlement, we look under the hood to see what’s really going on.
Our team is brought in to reconstruct financial statements, identify misappropriated or personal expenses, and analyze both forensic accounting issues and business value. We determine the true profitability of a business by correcting and undoing bogus accounting entries and making adjustments for assets or liabilities that weren’t on the books.
With several decades of combined experience, we collectively identified our favorite red flags that point to potential business fraud.
1. Complicated accounting with balances moved between accounts
Normally, a business has routine transactions and expenses like utilities. When the books are clean, these numbers are straightforward without a lot of fluctuation. But we start to wonder what’s going on when books show expenses entered in one account, but the balance is moved and it’s difficult to get to the original transaction.
2. Credit card payments entered without transaction detail
We may find a monthly credit card bill was recorded as one payment/business expense without any detail as simply “cc expense.” Sometimes this is a red flag indicating that someone is trying to cover up amounts paid for personal expenses.
3. High year-end volume or number of transactions
We’ve seen cases where a company realizes it’s not performing as well as it wanted and records fraudulent transactions at the end of the year to increase its reported sales and improve its financial outlook. This happens most often when executives are heavily incentivized with bonuses for better financial performance.
4. Suspicious cash disbursements
Those who have the power to write checks or issue payments on a company’s behalf sometimes abuse that power. One such method of abuse is authorizing cash disbursements to oneself or through cash withdrawals. Solid internal policies and controls that are effectively communicated and executed are ways to prevent fraud.
5. Non-cash shareholder contributions
When a business needs an infusion of capital for its operations, it will most likely come from shareholder contributions. It’s a red flag when a shareholder contribution was in the form of an asset other than cash, especially because it’s often more difficult to determine what the non-cash asset was actually worth.
6. Adjustments made to accounting records for a previous year after financial statements are issued
It’s suspicious when we see financial statements with entries for a prior year after the business has already gone through the rigor of year-end close and its auditors have done the clean-up work for that prior year.
7. Under compensation
Business owners sometimes choose to under-compensate an employee by agreement. We have seen this happen when the individual is a family member or was promised to receive something of value later. However, this can lead to higher risk that the under-compensated employee will make up for the shortfall through unauthorized self-dealing transactions.
8. Numerous bank accounts or related entities
When a company uses numerous bank accounts or related companies, financial transactions often become less clear due to constant moving of funds between accounts or companies. This can become a good cover for fraud, since complexity veils fraud.
9. High volume use of company credit cards
We’ve seen a number of cases where a business provided company-issued credit cards to employees but didn’t have good policies or processes in place for documenting charges. When credit card use isn’t questioned, it is more prone to abuse and fraud.
10. Lack of oversight for accounting
When small business owners take little interest in the accounting process and rely solely on another trusted individual, it can pose a greater risk for fraud.
For more details and insights on each of these red flags along with tips on how to mitigate them, see our full article here.
Morones Analytics is a forensic accounting firm committed to financial justice and integrity. We solve financial puzzles and tell a powerful story with numbers. Our highly skilled team of independent CPAs and financial experts have worked at top global accounting firms, in-house with major corporations and as business owners. We engage in detailed investigations and our work leads to expert testimony in court.
Forensic Accounting | Fraud Investigation | Damage Analysis | Business Valuation
