Originally Published by The Association of Certified Fraud Examiners, 2009
Economic downturns and recessions are notorious for encouraging fraud. As new and prospective fraud examiners, it's imperative that you become aware of the various fraud risks that can occur and the red flags that indicate a fraud in progress.
If you're ever called upon to audit a company or examine its practices to ensure the absence of fraud, you must be prepared to diligently cover all the bases. If you're lucky enough to discover there is no fraud afoot, you still need to quickly take the lead and implement prevention measures to deter any future possibility of fraud.
In today's economy, many companies are suffering financial losses and diminishing liquidity, which have presented conflicts with their primary lenders. Banks have come under increased scrutiny, which in turn has increased the pressure on borrowers.
In private companies, owners will feel added pressure to preserve what's left of their companies and livelihood. They will be desperate to stay afloat. when there are extreme creditor/lender pressures, and owner might not see any legal way oout of this mess. That's when the environment becomes ripe for fraud.
It's somewhat common for debtors to set up bank accounts at new banks and try to defraud the original lender by siphoning funds to the new location. Debtors might do this for two reasons: to defraud a bank outright or to keep a failing business alive. Fraudsters sometimes open accounts out of state or at other intstitutions where the primary lender won't be able to get its hands on the funds.
During the time when a bank is closing or restructuring a business that has defaulted on its loan, it's quite attentive to the activities and movements of the funds to which it is owed. It might liquidate certain assets or monitor the collection of receivables and new sales to get loans paid back and preserve its secured position as the first debt collector enabled to seek a return on its investment.
Under these circumstances, lenders often hire a firm to either assist the business in restructuring its debt or expense structure (making it into what is sometimes called a turnaround) or performing an orderly liquidaton, thus maximizing the recovery on the loan amount.
Some of the tools used are accounts receivable and inventory roll-forwards that track cash, accounts receivable, inventory, and accounts payable. These analyses are different from those performed during a financial audit, and they allow for increased scrutiny of cash. A typical roll-forward shows beginning cash for each period and then classifies all the increase/decrease into functional categories such as receipts, operating expenses borrowings/paydowns, etc.
Robert Bates, CPA, CFE, CVA, has over 25 years of Financial Management and Accounting experience as a Controller and CFO in various industries. He has been in several industries, including telecom, media, retail and financial services in addition to having consulting experience at startups in the software, technology, and life sciences fields. Mr. Bates specializes in International Accounting, Software Issues, and Obtaining Financing. The CFO of a public company, he has completed due diligence accounting/reporting for 12 acquisitions, including performing Business Valuations and dealing with FAS 142 issues. Mr. Bates has handled accounting for complex debt instruments including warrants, beneficial conversion feature, and other derivative issues.
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