Fraudulent Financials – What’s Your Advice? – Michael Dennis, CBF

Fraudulent Financials

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.

Michael Dennis, MBA, CBF, LCM

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

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.

6 Replies to “Fraudulent Financials – What’s Your Advice? – Michael Dennis, CBF”

  1. I was an underwriter in a past life for a bank. We would not except any financials other than audited P and L’s and signed tax returns. At least if a CPA signed off on it, they could be reported.Most CPA’s won’t risk their reputation.
    Thanks for the input. It is always interesting to see how different industries deal with these matters.

  2. I shared this with my boss and we had a good laugh; what appears too good to be true probably is. We would not be offering credit based on what you stated in the article, and I wouldn’t take time for a phone call to find out what they have to say. I spend more of my time these days investigating small orders for fraudulent credit card usage.
    I wonder if this is part of her job description to report possible fraud?

  3. That’s a good point Wanda. I don’t know many people who have time to report problems like this… not to mention the potential legal entanglements associated with even suggesting fraudulent behavior.

  4. If they claim they have been in business for 10 years, she should ask for financials for additional years. The more discrepanices she uncovers, the stronger her case for denial and/or consideration to report. I’d also process references for the bank and trades as usual and dig a bit deeper into each of those to ensure they are legitimate. Rather than an official government agency of some type, a good start might be the BBB just to see if they have anything on file. It might also be useful to ask for information on the principal owners and authorization for the CPA firms to answer inquires concerning the financial state of their mutual account. Like you I would tread lightly on making accusations to any agency as there is always unwanted fall-out.

  5. I am a few days late to this conversation. However, I have been both in banking and manufacturing. I know from banking and from the semiconductor company I worked at, that if you could not provide three years of audited financial statements, you did not get credit/terms. This was for credit lines that ranged from 7 figure to 8 figure. As far as reporting it…we neither had the time nor the will to get involved in what could be an infinitely complicated legal situation.

Leave a Reply

Your email address will not be published. Required fields are marked *