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How to Detect Business Fraud

economist.com

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Re: How to Detect Business Fraud

#51

Post by nickff »

refurb wrote: post #34
mierle wrote: post #32

For those who are interested in the accounting side, I highly recommend Financial Shenanigans by Howard Schilit [1]. If you don't have an accounting background, all you need to get value out of this book is a basic understanding of the double entry accounting method, and understand the four financial statements: balance sheets, income statements, cash flow statements, and statements of shareholders equity. After read…

I took a class specifically on this - how company manipulate their financial statements to make things look better. It's really fascinating. If you're willing to dig into the financial statements (and ones from the past), you can learn a ton about how a company defines "performance" and whether or not it's reasonable. Despite GAAP accounting rules, there is enough gray area for companies to hide a lot of bad informat…

Enron being the classic example of what you're describing.

Re: How to Detect Business Fraud

#52

Post by realtalk_sp »

refurb wrote: post #34
mierle wrote: post #32

For those who are interested in the accounting side, I highly recommend Financial Shenanigans by Howard Schilit [1]. If you don't have an accounting background, all you need to get value out of this book is a basic understanding of the double entry accounting method, and understand the four financial statements: balance sheets, income statements, cash flow statements, and statements of shareholders equity. After read…

I took a class specifically on this - how company manipulate their financial statements to make things look better. It's really fascinating. If you're willing to dig into the financial statements (and ones from the past), you can learn a ton about how a company defines "performance" and whether or not it's reasonable. Despite GAAP accounting rules, there is enough gray area for companies to hide a lot of bad informat…

Any book you'd recommend to get a quick general grasp of accounting? Aside from the one referenced in the parent, which I'm probably going to buy.

Re: How to Detect Business Fraud

#53

Post by refurb »

nickff wrote: post #51
refurb wrote: post #34

Earlier quoted context omitted.

I took a class specifically on this - how company manipulate their financial statements to make things look better. It's really fascinating. If you're willing to dig into the financial statements (and ones from the past), you can learn a ton about how a company defines "performance" and whether or not it's reasonable. Despite GAAP accounting rules, there is enough gray area for companies to hide a lot of bad informat…

Enron being the classic example of what you're describing.

Yup we covered Enron.

It's pretty interesting to study the mechanism of the fraud. Enron did a lot of things, but one of the big ones was how they booked revenue. Since they were a middleman, they should have booked their cut (i.e. fees) as revenue, but rather they booked the entire purchase as revenue, drastically inflating their growth.

Re: How to Detect Business Fraud

#54

Post by refurb »

realtalk_sp wrote: post #52
refurb wrote: post #34

Earlier quoted context omitted.

I took a class specifically on this - how company manipulate their financial statements to make things look better. It's really fascinating. If you're willing to dig into the financial statements (and ones from the past), you can learn a ton about how a company defines "performance" and whether or not it's reasonable. Despite GAAP accounting rules, there is enough gray area for companies to hide a lot of bad informat…

Any book you'd recommend to get a quick general grasp of accounting? Aside from the one referenced in the parent, which I'm probably going to buy.

Financial Shenanigans was mentioned by others. That one is pretty good!

Re: How to Detect Business Fraud

#55

Post by jgalt212 »

mirimir wrote: post #50

Inflating sales is a classic move: > In indictments involving the case, prosecutors said HBOC sold software or services to more than a dozen hospitals with conditional "side letters" that allowed the hospitals to back out of the deals. The side letters were then hidden from auditors and the transactions were reported as sales.[0] McKesson (and perhaps other pharma wholesalers) also played games by timing invoice paym…

I don't know how such tactics as side letters are legal. In finance, there's numerous hoops and rules to jump through to actually prove that you sold and asset and did not merely engaged in a dressed up repo transaction.

a few links

https://en.wikipedia.org/wiki/Repo_105

https://www.deallawwire.com/2017/05/18/true-sales-a-refreshe...

Re: How to Detect Business Fraud

#56

Post by mennis16 »

supernova87a wrote: post #41

Aside from this article (paywalled), I liked learning from some story that certain financial / bank employees are required by the Fed or SEC to go on vacation and not have access to their email or phone for a certain number of contiguous days every year. Is this correct -- was it something to do with the Madoff scandal? As I understood it, the idea was that to perpetuate a financial fraud, a criminal relies on being…

This was definitely a thing pre-Madoff even, my dad had to do this for two weeks every year as a foreign exchange trader.

Re: How to Detect Business Fraud

#58

Post by ip26 »

codazoda wrote: post #57

The first story is about finding out a company is junk, shorting their stock, then releasing the information. Is that not a form of stock fraud, or at least manipulation, as well?

Isn't it just price discovery?

Nobody would be upset if you bought a company you thought was undervalued and told other people they should buy it too.

Re: How to Detect Business Fraud

#59

Post by nmfisher »

jgalt212 wrote: post #55
mirimir wrote: post #50

Inflating sales is a classic move: > In indictments involving the case, prosecutors said HBOC sold software or services to more than a dozen hospitals with conditional "side letters" that allowed the hospitals to back out of the deals. The side letters were then hidden from auditors and the transactions were reported as sales.[0] McKesson (and perhaps other pharma wholesalers) also played games by timing invoice paym…

I don't know how such tactics as side letters are legal. In finance, there's numerous hoops and rules to jump through to actually prove that you sold and asset and did not merely engaged in a dressed up repo transaction. a few links https://en.wikipedia.org/wiki/Repo_105 https://www.deallawwire.com/2017/05/18/true-sales-a-refreshe...

Side letters are legal. Lying to an auditor is not.

Ideally, auditors would verify the legitimacy of a transaction with the counterparty. As in, physically visit their office and speak to the person whose signature is on the contract.

Unfortunately, this is impractical when there are hundreds or thousands of such contracts every year. There aren’t enough auditors and there’s not enough time. So mostly, auditors rely on the assumption that they’re not being provided with falsified documents, and they’re not being lied to.

Unfortunately, that’s sometimes (often?) just not true. Even though it’s illegal, it’s still highly vulnerable to exploitation.

Re: How to Detect Business Fraud

#60

Post by sfifs »

codazoda wrote: post #57

The first story is about finding out a company is junk, shorting their stock, then releasing the information. Is that not a form of stock fraud, or at least manipulation, as well?

If you were an insider, yes. If you are an outsider and especially if you disclose the position, no.
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