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Pick a Financial Statement Fraud, Any Fraud

We’re approaching the third anniversary of that legendary $50 billion fraud. You know the one we mean—the investment scandal that rocked the financial world when Bernie Madoff made off with his clients’ fortunes. Well, he didn’t exactly make off with the fortunes; it’s more like he’d recycled the same dollars—or rather, reshuffled the same electronic blips on the computer screen—so many times over, it was impossible to say for sure who had what. And in the end, nobody had much.

What was known for sure was that Madoff had pulled off a financial Ponzi scheme of epic proportions. Recently, in honor of this notorious event, Investopedia posted an article entitled: 5  Tips to Avoid Investment Fraud.

Briefly, the tips mentioned were:
1. Be aware of something that sounds too good to be true.
2. Do background checks –  conduct your own due diligence.
3. Make sure the funds are being managed by an outside arm’s-length  custodian.
4. Find out how much the manager has personally invested along with you.
5. Look for transparency and a clear explanation of the investment strategy.

Oddly enough, there was one important tip missing from this list.  We would have added:

6. Study the company’s financial statements.

In its 2010 Annual Report to the Nation, the Association of Certified Fraud Examiners (ACFE) estimated that 5 percent of a typical organization’s annual revenues are lost to fraud in at least one of three categories:  asset misappropriation, corruption, and, our favorite subject, financial statement fraud.

When a company loses, so do their shareholders.  And that’s why it becomes the lead story on the nightly business news. So, if you’re a shareholder—or about to become one—we’d like to share a little of what was included in the ACFE report.

Asset misappropriation is a common problem for manufacturers where fraudsters might be caught fudging invoices, stealing raw materials, and/or skimming money off the top, among other tricks.

As for corruption schemes, this is a wide-open field where mischief makers can pick from a wide assortment of illegal acts including bribes, undisclosed conflicts of interest, kickbacks, and a plethora of other choices too numerous to mention.

When it comes to financial statement fraud, it requires a whole new set of categories, each with a variety of opportunities to confuse the regulators and the public at large.  Those might include:
• Revenue recognition or timing schemes
• Fictitious revenue
• Concealed liabilities
• Improper asset valuation
• Inadequate disclosures

So maybe you’re reading this and thinking, “Great!  Thanks for that information.  Now, can somebody please translate?”

We’re glad you asked!  In fact, we have already translated it for you in an easy-to-read book we call, The Truth Behind the Numbers in Financial Statements: A Step-By-Step Guide to Investigating Before You Invest.

If you’ve never read a corporate financial statement before, it’s going to be a daunting task.  But if you read our book first, things will begin to make a lot more sense. You’ll be equipped to make smarter, more informed decisions before you decide to speculate on a company’s success. And if there is ever a copycat Madoff, whether it’s a big time felon or small time swindler, you’ll be less likely to become a victim.

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