What to do when you smell a rat
Beware! The Red Flags of Fraud
February 2017  
Through numerous economic cycles since we opened our doors, nearly 40 years ago, there has been one constant:

When times are bad ... immoral people commit fraud. 

When times are good ... immoral people commit fraud.
 
What can lenders and shareholders do to minimize the risk of fraud? How can counsel optimize outcomes for their victimized clients?  

Keep your eyes wide-open for red flags !
Red Flags of Fraud

Any of the following characteristics may indicate a fraudulent situation worthy of investigation:
  • Overly-complicated corporate structure
  • Related-party transactions
  • Chronic liquidity issues
  • Physical operations inconsistent with financial reports
  • Unique and/or industry-specific accounting issues
  • Antiquated accounting & reporting systems
  • Specific transactions or customers handled by the owner
  • Cutoff issues – sales, payables, cash receipts, inventories, etc.
  • Significant turnover of financial staff – CFO, Controller, etc.
  • Disagreements with auditors and/or auditor turnover
If your internal investigation finds a clean company, great! If not, call us and your counsel to protect your downside.  

Truth is Stranger than Fiction
Immoral people have at least one thing in common – they are pretty creative, as evidenced by our discoveries during fraud investigations. Here are some examples:
RED FLAG:  Shortly after it was acquired by a private equity firm, company suffered a major cash flow shortfall requiring a capital infusion by the acquirer. 

B&A Discovery:  Management delayed recording of certain operating costs until after delivering pre-closing financial statements, then buried the costs in the FAS 141 goodwill calculation.
RED FLAG:  Internet customers complained about a distribution company’s unauthorized credit card charges, resulting in an FTC investigation. 

B&A Discovery:  Complex financial and corporate web of fraudulent activities that had generated $20 million in unreported profits for the perpetrators. 
RED FLAG:  Management suspected employees and vendors were embezzling.  

B&A Discovery:  Traced multi-year fraud conspiracy by long-time employees and vendors through forensic accounting investigation.  
RED FLAG:  Developers failed to develop properties after receiving $20 million from EB-5 investors. 

B&A Discovery:  Traced cash flows to prove principals misappropriated significant investor funds for personal benefit. 
RED FLAG:   Member of multiple investment LLCs suspected partner of diverting funds to other LLCs for personal gain.

B&A Discovery:  Traced cash flows to prove fraudulent transfer.
Fraud
RED FLAG:     Lender suspected borrower fraud due to an over-advance on ineligible A/R and inventory. 

B&A Discovery:  Confirmed inventory fraud then convinced borrower to admit wrong-doing to achieve resolution as expeditiously as possible for Lender's benefit.  
Do you want to learn more about Red Flags and Fraud?

At Brandlin & Associates, we are zealous about mapping fraudsters' paths and bringing them to justice. Lenders, lawyers and trade associations frequently invite us to present the ins-and-outs of identifying and investing Red Flags.
Brandlin & Associates is an exclusive provider of financial workouts and restructurings, forensic accounting, financial due diligence and litigation support for senior lenders, mezzanine funds, private equity groups, attorneys and middle market companies.

We pride ourselves on offering superior technical expertise, years of practical experience and unparalleled service to decipher financial and operational performance metrics. As a result, our clients are able to make informed decisions in a timely manner.
Brandlin & Associates
Brandlin & Associates
Los Angeles 310.789.1777 | New York 646.475.8507