A Beginners Guide To Accounting Fraud (and how to catch people trying to get away with it)

If you haven’t read Leo Perry FT piece?"A beginner’s guide to accounting fraud (and how to get away with it)"?please take a read. ?

Someone shared the piece with me this morning with the sentiment of doesn’t it **** you off when people publish things like this. I took a read at the piece and here are a few reactions:

1. Leo has obviously been in this stuff up close with his Wirecard experiences with Dan McCrum , and like all short sellers arguably has an eye for this stuff that you only wish existed more widely in the gatekeeper community to make professional skepticism truly skeptical. We can all learn from the experiences he shares – regardless of the gut reaction at the headline.·?????
2. Sadly, Leo paints a highly accurate picture with the methods he describes that revenue recognition schemes have been and continue to be highly lucrative approaches to accounting fraud [and remember if you think the headlines are too full of this stuff already, research suggests the good guys only catch a third of it].
3. He is sadly right, that too few people responsible for evaluating business financial condition, especially gatekeepers, rarely make the effort to validate claims around revenue. It is very time consuming and there are too many companies to look at in the depth it probably needs [if there is no sign of where to look first and most].
4. He is also right that existing shareholder due diligence is rarely enough to challenge “inventive” approaches to sales generation. As someone wrote me last week, the many benefits of the Bloomberg terminal may have made some people who can and should evaluate risks too lazy and insufficiently curious.
5. Where Leo would have been right a couple of months ago but is wrong today …. is the statement “From the outside there’s just no way to spot anything wrong in our revenue numbers”. Because as of February this year, there actually now is.?

I and my CEO and co-founder Alexis C. Bell, MS, CFE built it in some considerable part, so we wouldn’t spend the rest of our years on this planet having a visceral reaction to the same old headlines of the industry couldn’t see it coming. That excuse and sadly in some corners apathy has frankly begun to disappear. The future stands to be very different.

Our experience is that accounting fraud could always be seen after the fact – the industry needed to just look earlier, with scale, and with simple pointers of where to prioritize risk and interventions. Hindsight is entertaining - foresight is riveting.

It is possible to see the risk of accounting fraud in flight, and our solution can see it time after time it's published in company financials - even on day 1 in the market.

For those that don't know, ?óta Signal Analytics provides an outside-in, early warning of financial misstatement risk. Both the misstatements (sorry we messed up the numbers) and accounting fraud risks by scheme (sorry we messed with the numbers).?We signal what we call reporting veracity.

Fundamentally, ?óta Signal Analytics does two things for those who want to tackle this problem. First, as Paul Munter of the SEC called out last year, it looks for pressure; those precursors, tell-tale signs and giveaways in the financials that the circumstances are present (or to keep with Leo’s banana and lemon fruit revenue scheme “ripe”) for accounting shenanigans. They are of course equally ripe for legitimate interventions by management – but that is another post.?

Second, as the SEC Chief Accountant puts it, the solution does it with a “fraud lens”. So whatever financial statement fraud scheme is in play, it signals it. So, gatekeepers, shareholders, regulators and frankly any data-rich but often insight poor observers can see what is hidden in plain sight, and then prioritize that heavy validation effort and intervention where it matters most.?

So, I responded to my network, with no I’m not bothered that Leo wrote the article. It needs people like Leo to say it the way that it is. And it needs more of us to make those who are already doing it understand that the days of not being visible are limited. The industry no longer needs to wait for the tide to go out, to see who isn’t wearing appropriate attire.?Finding this stuff can actually be a lot easier than historic methods have been.

Great piece with the FT. I’m certainly energized at the idea that someone is going to take on the hopefully tongue in cheek call to action of “you’re here for a pound note and it’s there for the making”. But I am even more excited knowing that we already risk scored every publicly traded company globally back to the 1980s, and those who didn’t wait for Leo’s "beginners" piece and have already been busy messing up or messing with their financials are already risk-scored and highlighted.?

I am also going to put my hand up on the other challenge – I and a few others did actually get into this game to make the world a better place, and as we highlight inventive revenue recognizers, something tells me that we may have made the right choice.?

If you are on the good guy side, please Like and Repost. If you are going for the pound, we will see you in the data!