Cooking the books!

For no 2 overstating the value of their assets is a classic.

Holding a lot of "assets" that are actually debt/liabilities, e.g. investing in a lot of derivative instruments (which can potentially be infinitely recursive, or outright toxic)

Making a lot of short-term transactions to push back the date of liabilities

Counting the value of all assets/revenues immediately, but finagling costs & liabilities to hit the books in a later period

Moving /holding cash offshore in non-transparent accounts

Shuttling cash, assets, debts, costs, etc. through a network of business units, subsidiaries, shell companies, partnerships, etc. to confuse ownership and balance sheets

Offering products on sale-or-return but booking each item shipped as a sale, without accounting for a reserve against returns (a publishing house could do this, for example).

Inflating sales margin by not accounting the true cost of items shipped - e.g. selling software licenses by shipping the software pre-installed on devices, and not mentioning that you're basically giving servers away in the bundle.

For number one, I'd be looking at return on investment and comparing net profits, cash flow, long term investments, available capital and basic profitability against industry standards. For example, cost of goods sold for a restaurant above 30% would be an indicator that either there is an opportunity to cut costs and boost profit or that the market isn't there for the product being sold. A long-used classic measure is whether assets are worth more than the company itself (prime opportunity to buy the company and break it up for a quick profit).

Overvaluing assets is a classic way to inflate a company's value, but investing in derivatives is a more current dodge. Offshore accounts are problematic now, but recording liabilities as long term and income as short term can fool a lot of normal accountants. For example, a liability due annually being recorded as due next year but the income you'll pay for that liability being recorded as immediate. Only works for a short while.

The options really depend on the business. Cash businesses are easy. Run a laundromat. Only count every third quarter in the machines and pocket the rest. Credit cards and cheks leave bank trails, but cash only has a trail when you deposit it. Be aware that the IRS knows you're doing this and only lets you slide so far.

Jeff

Here's a couple of more.

1. How long is it taking to pay bills. If you see the length expanding, you have to wonder about overall cash flow. A company will often camouflage this by putting in additional controls to ensure proper accountability. It could be legitimate needs, but it often is a way to slow down cash outflows.

2. Priority in paying bills. As a company becomes short on cash, it will pay those bills that it needs to first. A simple example would be do you pay for heating oil for your house or do you buy snow tires? You need both, but which can you live without better? Companies face the same choices. The more a company is having to make these choices, the worse the cash position is.

3. Average daily bank balance. If you see a gradual decline in the average daily bank balance, you've got to wonder if something is going on.

Options here are infinite, both for finding these sorts of problems, and hiding them.

Jim Clark-Dawe

Enron is a classic and Bernie Madoff was one of the best, although you have to factor into this that Madoff's clients seem to be rather dumb. Ponzi had a nice simple scheme, and the original has been copied many times. I also like Lehman Brothers.

Any time someone wants something for nothing, it requires two things. Someone willing to sell it and someone willing to buy it. The ease of selling this is directly related to how desperate the buyer is.

Jim Clark-Dawe

Los Pollos Hermanos said:

Shuttling cash, assets, debts, costs, etc. through a network of business units, subsidiaries, shell companies, partnerships, etc. to confuse ownership and balance sheets

So, if anyone is able to link me to some examples/case studies to peruse I'd be really grateful!

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That's a component of many large-scale fraud and money-laundering prosecutions.

I believe it figured significantly in the case of Enron.

Los Pollos Hermanos said:

Good evening, lovely people of AW, and here's pretty please another query from me!

Location: UK-based, although I assume such shadiness across the oceans will be the same/similar.

1). What might a financial statement from an accountant (the kind shown on Companies House, not the full accounts) show to suggest a business might be (slowly) going down the tubes? I assume it's something to do with the relationships between creditors, debtors, liabilities, cash in the bank, etc.? What could someone - for example, a possible investor - studying the statement see that would make them say "No thanks, pal!"?

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You can see how much profit they made in recent years compared to previous years. You can also check if the amount of money they're making fits in with the number of people in the company and the number of directors. Like if they have a few directors and are only making enough money for one person's salary, then none of the directors are going to be earning that much.

You can also look online for information about the company, e.g. reviews, various sites that list local traders, etc. You might find people complaining of delays in orders or suppliers complaining of not being paid on time. You can even look on google maps to see what the company premises look like.. you know, big flashy office versus offices that look like Norma Bormann's in The New Statesman.

Is this for the same story as in the other thread? If someone has access to the systems at work, they could just look up this person's credit rating. They would be breaking the data protection act and risking getting sacked, but they may not care about those things or may be high up enough in the company that they're not scared of getting caught. If they work for the bank he banks with, they could look up his bank account (again totally illegal and a sackable offence but you wanted dodgy so that's what you're getting) - they could check his business or personal bank accounts. Either would show ample evidence of financial strife. Not just obvious things like being in the red... you'd see expenditure higher than income over a long period of time. If you want to get even more dodgy maybe someone could bribe an employee at an appropriate company for the info. Though that's now getting into serious fraud territory, seeing as most people bribing employees for customer info want to use the info to commit fraud on a large scale, not get back at a neighbour. Attempting to bribe a bank employee for the info would likely get your character arrested. If they have a friend who works there that they can bribe that might be more plausible (assuming said friend is dodgy enough that they'd actually do that and risk their job over it). There are likely to be numerous other variations on the theme of people accessing information that they shouldn't be accessing.

Talking of The New Statesman, Alan B'stard was pretty nifty with his financial shenanegans. The entire series might give you some inspiration, though you'd have to scale it down to the appropriate level and also not directly copy but it might give some ideas as starting points, in particular how to make a really dodgy company look like a great investment.