When companies in California and around the country engage in financial fraud, their activities are often discovered by investigators or forensic accountants who notice irregularities or anomalies on their financial statements and reports. Unscrupulous businesses go to great lengths to conceal fraud, but they are not always able to do so. This is because publicly-traded companies are required by law to submit detailed financial disclosures every year.
Financial statement red flags
When forensic accountants scrutinize financial statements, they look for known red flags and items that seem to be anomalous. Their suspicions are aroused when businesses are making healthy profits during a recession or when their competitors are struggling, and they pay particularly close attention when financial statements show a surge in revenue that is not supported by a corresponding increase in cash flows. Companies that engage in fraud also tend to earn a disproportionate amount of their profits in the fourth quarter of the fiscal year.
The energy giant Enron tried to conceal its white-collar crimes with clever accounting tricks, which has led to far closer scrutiny of corporate financial documents. Investigators and financial specialists look for complex transactions involving third parties that provide little value and may be concealing debt, and they pay close attention to depreciation schedules that are out of step with industry standards. Lax corporate governance, auditors that quit shortly before financial disclosures are due and executive compensation packages that are based largely on short-term targets are other common signs of fraud.
Fraud is difficult to hide
Fraud is not uncommon in the business world, but companies that are required to provide detailed financial records can find it difficult to hide. Forensic accountants pore over these documents looking for irregularities and red flags, and they hone their skills by learning about the mistakes made by companies like Enron.