Corporate Fraud: Red Flags in Company Finances

Robert Smith, capital markets correspondent at the Financial Times, spoke to the YFLA (Young Fraud Lawyers Association) last night about his work uncovering corporate financial wrongdoing. Robert won the Private Eye’s Paul Foot Award in 2021 for his corporate investigations work.

Red flags include:

1) Is the company stating very high cash reserves yet still borrowing significantly at expensive rates? Question how real those cash reserves are.

2) Is the company transacting with lots of undeclared related parties?

3) Is it operating as a “roll up” business, relying on financed acquisitions for growth? This can make annual balance sheets difficult for investors to compare and fraudulent activity easier to hide.

These factors won’t always be indicators of fraud, they can of course be legitimate business activities - but they can also be reasons to investigate further.