Mergers and acquisitions are filled with risks, some of them unavoidable. But buyers can avoid risks associated with cooked books and other forms of deceptive accounting used by a seller to distort the value of its company. Before closing an acquisition, engage a forensic accounting expert to look for fake performance figures and hidden liabilities that might turn your deal into a disaster.
When reviewing a seller’s financial statements, forensic experts look for subtle warning signs of fraud. These include:
Increased accounts payable and receivable combined with dropping or stagnant revenues and income
An unusually high number of voided discounts for returns
Lack of sufficient documentation in sales records
A large number of account write-offs
Increased purchases from new vendors
Fishy revenue, cash flow and expense numbers and unreasonable-seeming growth projections warrant further investigation to determine whether financial statements represent fraud or they’re evidence of unintentional errors or mismanagement. The latter is common in smaller companies that don’t have their statements audited by outside experts or that may not have adequate internal financial expertise.
To determine whether unusual income numbers indicate systematic manipulation, experts often consider whether owners or executives had the opportunity to commit fraud. A lack of solid internal controls makes financial statement fraud more likely. Regulatory disapproval, customer complaints and suspicious supplier relationships can also raise red flags. If warranted, a forensic expert may perform background checks on the target company’s principals.
It’s important to note that some accounting practices adopted to present a company in the best light may be perfectly legal. However, if your expert finds evidence of intentional fraud, you’ll probably want to rescind your acquisition offer. In less serious cases, you may simply need to make purchase price adjustments or even change the deal’s structure — such as offering to buy only part of the company or only certain assets.
Even when a target company attempts to conceal weak performance or questionable business activities, a forensic accountant can reveal the true financial story. Contact Ashley Lee, CPA, CFE at email@example.com for help evaluating your potential business acquisition.