Changes in employee behavior and job performance can signal problems related to fraud. Sometimes these changes are quite visible, and management is left with the task of determining whether or not the company is at risk.
However, determining which operational characteristics and financial results signal the potential for fraud may not be so easy. Yet owners, executives, auditors, and attorneys must increase their fraud knowledge and look for these deficiencies.
A good search for fraud must start with the company’s financial statements, specifically the statement of cash flows. If you see that more cash is consistently going out the door than is coming in, the business clearly has problems. It can only sustain such bleeding for a finite period of time.
If the core business is legitimately losing money, that is one explanation for the cash drain. But if the company is consistently turning a profit on paper but still bleeding cash, this is worrisome.
Of course, as a company expands, there may be ongoing cash needs. And it’s quite possible that cash may be spent for materials and labor ahead of the customer payments being received. Yet when a company is consistently cash poor while sales and market share are increasing, this is cause for concern and needs to be investigated. Why is the company bleeding cash when sales are good?
Another warning sign may be a company that is flourishing during a time when competitors are struggling. If a particular industry has a noticeable downturn, yet your company is still flying high, this must be examined.
Of course it’s possible that your company has greater efficiencies and a better process that allows it to profit even during difficult times. Sometimes, however, the apparent prosperity is a function of fraudulent accounting and fraudulent financial statements. The further out-of-line the company is with its nearest competitors, the more suspect the numbers become.
Up next: Digging into the records to look for red flags