Warning Signs of Corporate Fraud

We’ve seen time and time again how corporate fraud can cause devastation in it’s path, including well-publicized examples like Enron, Tyco and WorldCom. And even though many of these famous examples are long behind us, corporate fraud continues to be both common and harmful. Not only does it directly damage investors and employees, but it also has a domino effect on the financial markets and other organizations in the same industries as investors and lenders quickly and understandably lose faith.

Here are a few warning signs for you to monitor:

• Late filings with the SEC. Public companies must warn the SEC if they plan on changing sales or earnings figures for a given quarter. Having this happen once or twice generally isn’t something that you need to worry about, but as soon as it becomes a pattern, you need to take a closer look at the business’s books.

• High additional compensation for executives. If executives are receiving an extraordinary amount of compensation beyond just their base salary, it could be an indicator of fraud risk. Corporate leaders are humans, and humans are naturally subject to the temptation of manipulating results to maximize potential rewards.

• Significant periods of growth in earnings per share. Companies generally have ups and downs when it comes to their earnings per share. But it’s extremely unusual to have long, consecutive periods of growth. Legitimate, solid managed growth is a good thing; unbelievable growth in a declining market should be investigated more closely.

• Other symptoms in financial reports. Large buildups of inventory, declining cash position, large increases in accounts receivable, unusually low depreciation costs, rapidly declining R&D expenses, and other similar trends are all cause for concern and may in fact be warning signs of wrongdoing and fraud.

In this day and age where manipulation of financial results remains far too common, it’s important to stay vigilant and monitor for red flags, symptoms and other indicators of aggressive accounting and outright deceit. Better to be overly suspicious than to be caught unaware.

John J. Hall, CPA

John J. Hall, CPA, is an author, speaker and results expert who presents around the world at conventions, corporate meetings and association events. Throughout his 35-year career as a business consultant, corporate executive and professional speaker, John has helped organizations and individuals achieve measurable results. He inspires audience members in corporations, not-for-profit organizations and professional associations to step up, take action and “do what you can.”