If you thought accountants and bookkeepers were boring, uncreative and unimaginative, think again. Some company accountants go to extreme lengths to make the companies they work for look profitable, attractive and efficiently run in order to please their shareholders, meet sales targets, adhere to domestic and international legal requirements and avoid paying too much tax. Forensic accountants need to be on top of their game to spot the ‘sleight of hand’ that can affect the year reports and financials.
While it must be said that most companies are honest and transparent, ethically and responsibly run, here are four scams that certain non-ethical companies may use to cook the books, which, essentially, is corporate fraud.
1. The ‘other’ ghost company
Companies are very good at creating sub-companies or ‘separate legal entities,’ that might hide various expenses or perform undesirable functions that the parent company does not want either on their books or it be known that they are connected with. Because the sub-company is a separate legal entity and not wholly-owned by the parent company they can disguise or dress up figures and divert unwanted attention from shareholders and investors. In larger companies this can result in a global spider’s web of ghost companies where money is ‘laundered’ and circulated back to the parent company.
2. Accelerating Revenues
This might be where a company logs a long-term service as a lump-sum payment in current sales to boost this month’s profits and meet targets. Perhaps a cleaning company receives an up-front payment for a 2-year contract but logs the full payment as current sales instead of dividing the sum over the 24 months of the contract or ‘amortising’ it.
3. False inventory
This can work in many ways – an employee may order ten widgets but only log eight and take two home to put on Gumtree or eBay. The other way is a company may order ten widgets but have an ‘arrangement’ with the supplier to only invoice for eight and sell the other two widgets through a separate company. Allied to this is the ‘kick-back’ where two companies or individuals within a company conspire to inflate or deflate the costs of a service in order to cream or siphon goods, or money, off a legitimate transaction.
4. Channel Stuffing
Near the end of a financial period- month, quarter, year – when budgets and targets are scrutinised and reports and statements need to be produced, a company may make a large shipment (often unwanted or slow-moving goods) to its distributor that it logs as current sales, when it knows that the distributor can and will return unsold stock. Consequently this cost comes back to haunt the company further down the track but the thinking is- at least this accounting period looks good.
There are a many more ploys that accountants and companies use to manipulate figures and camouflage the true state and worth of a company.
Frenkels Forensics are experts at uncovering even the most complex financial manipulation. It may take time, but we will expose them all eventually.
By Vitek Frenkel – find me via Google+