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How to Detect Business Fraud
- deerIRL 6y agohttps://outline.com/gdqBaR https://outline.com/gdqBaR
- laegooose 6y agoDoesn't work. "Something went wrong We're sorry. This page failed to Outline."
- ErikAugust 6y agohttps://beta.trimread.com/articles/13934 https://beta.trimread.com/articles/13934
- vulcan01 6y agoMust not have worked earlier. It works now :)
- ErikAugust 6y agohttps://beta.trimread.com/articles/13934 https://beta.trimread.com/articles/13934
- wrkronmiller 6y ago> Each stock fraud is fraudulent in its own way. But there are common elements. One is a breach between earnings as defined by Generally Accepted Accounting Principles (GAAP) and non-GAAP measures. Another is an increase in “days payable outstanding”, a yardstick of how long it takes a company to settle bills with suppliers. Delay boosts cashflow, at least for a while. So does gathering more quickly payments you are owed. Firms with dressed-up earnings also tend to pile on debt because they lack strong underlying cashflow. And there are grounds to suspect the worst of companies that engage in a lot of acquisitions. Aligning the accounts of acquirer and acquired gives ample scope for fiddling. > Transcripts of conference calls with stock analysts can also be revealing. If the company keeps moving the goalposts, then be on alert.
- Deleriumm 6y agoThanks, I couldn't read the article.
- known 6y agohttps://archive.vn/yDhDb https://archive.vn/yDhDb
- jolmg 6y ago> 403 Forbidden -- Cloudflare
- gruez 6y agoI don't think they actually use cloudflare. Neither their nameservers nor their server IPs are cloudflare. They only copied their interstitials.
- jolmg 6y ago> nor their server IPs are cloudflare They are for me, apparently because I'm using cloudflare's DNS service, and cloudflare is returning its own IP when I query for archive.vn's. $ dig +short @8.8.8.8 archive.vn 5.196.68.232 $ dig +short @1.1.1.1 archive.vn 1.0.0.1 1.1.1.1 They don't return themselves for all hosts, $ dig +short @1.1.1.1 google.com 172.217.9.14 I wonder by what criteria they intercept, and if this by archive.vn's or cloudflare's initiative.
- function_seven 6y agoThis link should answer your questions and give the backstory. https://news.ycombinator.com/item?id=19828317 https://news.ycombinator.com/item?id=19828317
- rckoepke 6y agoFor others seeing this who need a short and simple fix: this seems to happen when your DNS server is 1.1.1.1, changing to 8.8.8.8 or anything else fixes it. archive.is has a disagreement with cloudflare at the moment which makes it unusable on cloudflare's DNS.
- Faction 6y agoI can't see the article. I guess I will never find out now how to detect business fraud.
- ikeboy 6y agoHighly recommend "lying for money" by Dan Davies, a very readable account of a wide range of business frauds.
- camjohnson26 6y agoOther great reads: The Match King The Smartest Guys in the Room Bad Blood Billion Dollar Whale Also, famed short seller Jim Chanos teaches a class on frauds and recently posted this short list of recommendations: https://twitter.com/WallStCynic/status/1256962642499035137?s=20 https://twitter.com/WallStCynic/status/1256962642499035137?s...
- kratom_sandwich 6y ago"The Smartest Guys in the Room" was great, indeed. Also, the book from the guy who reported Madoff to the SEC sounds interesting: https://en.wikipedia.org/wiki/No_One_Would_Listen https://en.wikipedia.org/wiki/No_One_Would_Listen
- gxqoz 6y agoAgreed, this is a great book that goes over many different types of fraud with amusing examples.
- advisedwang 6y agoGood investigative reporting into shady business practices good for this world. However short selling companies before dropping your investigation is a massive conflict of interest. Muddy waters is incentivized to produce a scandalous hit piece, rather than necessarily do fair or accurate reporting. They will make money regardless. The damage their reporting does may make a self-fulfilling prophecy, ensuring they don't get a reputation hit for inaccurate scoops. I'm surprised the economist didn't even include a nod to the potential manipulation going on here.
- nodesocket 6y agoAbsolutely. Just look at Pershing Square‘s Bill Ackman. He goes on CNBC essential calling for the end of the world, turns out he had credit protection on bonds and tuned a huge profit[1]. [1] https://markets.businessinsider.com/news/stocks/bill-ackman-hedge-profits-billions-coronavirus-tanks-stock-market-economy-2020-3-1029035562 https://markets.businessinsider.com/news/stocks/bill-ackman-...
- camjohnson26 6y agoAnd a thousand other hedge fund managers talk about how bright the future is after investing in stocks. Maybe we shouldn’t rely on hedge fund managers for our opinion of the economy.
- WalterBright 6y agoI believe them about as much as I believe the promoters of "Get Rich Through Real Estate" seminars. If their methods worked, they'd be getting much richer doing real estate than pushing seminars. I recorded one once on TV, and carefully went through the spiel. It was fairly complex, and I was suspicious it was hiding something. Turns out, it relied on tricking the other party into accepting a bond with a maturation value of $10,000 instead of $10,000 now. The money was made on the difference.
- pdonis 6y ago
- clairity 6y agoit would be interesting to codify the known heuristics of forensic accounting into a software package (maybe even AI all the things!), then create a company out of it in partnership with prosecutors and regulators to root out fraud like this through both technological and legal means. i'm sure there have been some efforts to that end, though not commonly known. it would help rebalance the legal system toward the service of people over corporations.
- camjohnson26 6y agoThe problem is getting anyone to care while the fraud is still making money
- clairity 6y agothat's the point of combining it with lawyers--you find clients, possibly grouped into class actions, to sue the fraudsters (and make money that way).
- alexpotato 6y agoSo an interesting fact about class action lawsuits: There were initially created to combat civil rights cases. For a long time, minorities who were seeking legal relief against large companies could not afford to mount legal battles. The class action lawsuit was created as way for plaintiffs to pool resources and incentivize lawyers to take these kinds of cases. Only later on was the class action lawsuit applied to regular civil cases.
- spsrich2 6y agoModern Business 101!
- bryanrasmussen 6y agosomething like https://linkurio.us/ https://linkurio.us/ built on Neo4J, that's how I know about them. on edit: you might also like to read https://commons.erau.edu/cgi/viewcontent.cgi?article=1401&context=adfsl https://commons.erau.edu/cgi/viewcontent.cgi?article=1401&co...
- elliekelly 6y agoThe China Hustle[1] is a great documentary about the systemic securities fraud committed by Chinese companies selling into the American markets in a way that allows them to avoid much of the disclosure and due diligence typically required. It follows investors from the Muddy Waters firm mentioned in the this article and was made by the same group who did documentary version of The Smartest Guys in the Room. I believe the film is currently streaming on Hulu. [1] https://en.wikipedia.org/wiki/The_China_Hustle https://en.wikipedia.org/wiki/The_China_Hustle
- crishoj 6y agoThank you for this. The extend of these scams is mind boggling.
- csomar 6y agoExcept, the problem, is that the China Hustle displayed AliBaba in a bad shape and I doubt the guys were short the NYSE:BABA stock. The film was slightly hinting that you should be shorting or offloading your BABA stock. But what happened since? The film was released in 2017 (BABA around ~90) and now the stock is trading around ~195. So if you offloaded your stock, you'll have lost on some nice gains. It's worse if you have shorted: It'd have been a real hustle and it's not clear when the stock will correct.
- hippich 6y agoIMHO, exposing issues at the company does not guarantee its stock will go down. After all, investors (broadly defined, as in individual ones, 401k, mutual funds, pensions, etc) can keep momentum up. Something about the market can stay irrational longer than an individual investor's account positive. So it is risky no matter what, just perhaps risk/reward ration increases maybe?
- RandomWorker 6y agoI think one of the most interesting methods of business fraud detection is Benford's law. It has been found that natural transactions do abide by this law. https://en.wikipedia.org/wiki/Benford%27s_law https://en.wikipedia.org/wiki/Benford%27s_law
- jerzyt 6y agoIn real financial data you'll often see departures from the Benford's law. For example, if a company has $50 expense limit for dinner, you'll find a lot of invoices for $49.99. Same goes with approval limits at different management level. Not as useful in practice as in theory.
- craydandy 6y agoI've found the same. It sounds great and applicable but could not find any practical application with real data. Even when applied to large number of real companies' journal entries, the amount of false positives is overwhelming.
- mierle 6y agoFor those who are interested in the accounting side, I highly recommend Financial Shenanigans by Howard Schilit [1]. If you don't have an accounting background, all you need to get value out of this book is a basic understanding of the double entry accounting method, and understand the four financial statements: balance sheets, income statements, cash flow statements, and statements of shareholders equity. After reading this book, I found myself digging through earnings reports to look for signs of shenanigans, and have found cases that raise my armchair-accountant eyebrows. [1] https://www.amazon.com/Financial-Shenanigans-Fourth-Accounting-Gimmicks/dp/126011726X/ https://www.amazon.com/Financial-Shenanigans-Fourth-Accounti...
- refurb 6y agoI took a class specifically on this - how company manipulate their financial statements to make things look better. It's really fascinating. If you're willing to dig into the financial statements (and ones from the past), you can learn a ton about how a company defines "performance" and whether or not it's reasonable. Despite GAAP accounting rules, there is enough gray area for companies to hide a lot of bad information.
- nickff 6y agoEnron being the classic example of what you're describing.
- refurb 6y agoYup we covered Enron. It's pretty interesting to study the mechanism of the fraud. Enron did a lot of things, but one of the big ones was how they booked revenue. Since they were a middleman, they should have booked their cut (i.e. fees) as revenue, but rather they booked the entire purchase as revenue, drastically inflating their growth.
- hippich 6y agoIf I remember correctly, at that time it was legal to book it this way. Perhaps that was "innovation" that allowed Enron to shoot to the moon?
- georgianar 6y agoThanks to Robinson buckler ..Email this great herbal doctor cured me from herpes virus and he brought my ex lover back via his email robinsonbucler@gmail. com ...........
- nakedshorts 6y agoSelf plug: If you are interested in short selling and activist funds, I run an online community where people post original research and discuss other short theses: https://activist.cafe/ https://activist.cafe/
- supernova87a 6y agoAside from this article (paywalled), I liked learning from some story that certain financial / bank employees are required by the Fed or SEC to go on vacation and not have access to their email or phone for a certain number of contiguous days every year. Is this correct -- was it something to do with the Madoff scandal? As I understood it, the idea was that to perpetuate a financial fraud, a criminal relies on being present and able to intercept / continue feeding fraudulent information to others and not be discovered. Or maintaining some fraudulent trading position. The tactic I liked about this was the thinking about what's required to perpetrate a fraud, and make the conditions difficult or impossible for someone to go undetected. Rather than retroactively finding the fraud and just trying to detect it better when it has already happened.
- mennis16 6y agoThis was definitely a thing pre-Madoff even, my dad had to do this for two weeks every year as a foreign exchange trader.
- mirimir 6y agoInflating sales is a classic move: > In indictments involving the case, prosecutors said HBOC sold software or services to more than a dozen hospitals with conditional "side letters" that allowed the hospitals to back out of the deals. The side letters were then hidden from auditors and the transactions were reported as sales.[0] McKesson (and perhaps other pharma wholesalers) also played games by timing invoice payments and chargebacks to increase quarterly growth. 0) https://www.nytimes.com/2005/01/13/business/mckesson-agrees-to-pay-960-million-in-fraud-suit.html https://www.nytimes.com/2005/01/13/business/mckesson-agrees-... Edit: Another tactic is hiding rebate and chargeback transactions in numerous ~unauditable spreadsheets, stored on individual employee machines. Or even only as hard copy.
- jgalt212 6y agoI don't know how such tactics as side letters are legal. In finance, there's numerous hoops and rules to jump through to actually prove that you sold and asset and did not merely engaged in a dressed up repo transaction. a few links https://en.wikipedia.org/wiki/Repo_105 https://en.wikipedia.org/wiki/Repo_105 https://www.deallawwire.com/2017/05/18/true-sales-a-refresher/ https://www.deallawwire.com/2017/05/18/true-sales-a-refreshe...
- nmfisher 6y agoSide letters are legal. Lying to an auditor is not. Ideally, auditors would verify the legitimacy of a transaction with the counterparty. As in, physically visit their office and speak to the person whose signature is on the contract. Unfortunately, this is impractical when there are hundreds or thousands of such contracts every year. There aren’t enough auditors and there’s not enough time. So mostly, auditors rely on the assumption that they’re not being provided with falsified documents, and they’re not being lied to. Unfortunately, that’s sometimes (often?) just not true. Even though it’s illegal, it’s still highly vulnerable to exploitation.
- codazoda 6y agoThe first story is about finding out a company is junk, shorting their stock, then releasing the information. Is that not a form of stock fraud, or at least manipulation, as well?
- ucha 6y agoThey exposed Luckin Coffee $LK and called it a fraud in January to no reaction in the market. The stock collapsed 80+% before being suspended in April. They had this exchange of tweets with Citron Research which might be my favorite case of "I told you so": https://twitter.com/muddywatersre/status/1245704324342108161 https://twitter.com/muddywatersre/status/1245704324342108161
- blackrock 6y agoCan you detect any shenanigans going on at Tesla? If so, then this would be a very good stock to short.