From time to time, subscribers to my newsletter call me for advice. Often, I can help. Occasionally, I am at a loss. Last week, I was stumped.
The caller had a story and a question. The story was that she was asked to evaluate an applicant for a 7 figure credit limit. She requested and received 12/31/11 financial statements. They were not audited. The applicant explained that the auditors had not completed their work but that the audited statements would be available in late March. She then asked for and received the prior-year end financial statements. She found they were not audited. Instead, they were compiled and reviewed by a small CPA firm. She requested confirmation that the 2011 statements would be audited but never received a response. She compared the 2010 statements to the 2011 statements and found the following anomalies:
- The income statement showed sales more than tripled from 2010 to 2011.
- Net income after tax increased 20 times year over year.
- Net worth tripled year over year.
- Each ratio she calculated year over year improved dramatically including ratios for profitability, financial leverage, efficiency, and liquidity, and
- The internally prepared Balance Sheet for 2011 didn’t balance. Assets were greater than Liabilities + Equity by 2%.
Another piece of information she shared was that the applicant company said the corporation had been operating for more than 10 years, but the Secretary of State’s office website reported it was incorporated in 2009.
The caller told me she believed she had been supplied with fraudulent financial statements for 2011, and asked she could report to. I responded that I agreed that the 2011 statements were suspicious if for no other reason than the fact that the corporation in business for more than a decade was unlikely to triple its sales revenue in a single year. I said that suspicion of fraud is not proof of fraud.
The caller said she was ready to proceed. I could not recommend any agency or entity to report this to, and I asked her to reconsider. That was my advice. What’s yours?
Michael Dennis’ Covering Credit Commentary. Michael’s website is www.coveringcredit.com.
The opinions presented are those of the author. The opinions and recommendations do not necessarily reflect the views of CMA, or their Officers and Directors. Readers are encouraged to evaluate any suggestions or recommendations made, and accept and adopt only those concepts that make sense to them.