An experienced valuation analyst knows when something is “off.” Digging deep into the books of a company can uncover all sorts of insights, including the realization that things are not what they seem. Training, experience, knowledge of the industry, intuition — a valuation analyst leans on all these to identify the red flags and determine when numbers like revenue, compensation, and other expenses just don’t “add up.”
At this point, the valuation process transitions into one of forensic accounting — a process of unraveling financial and compliance puzzles to identify hidden assets, income sources and possible fraud, which can significantly affect a company’s value.
Follow the Money
Forensic accounting uses several tried-and-true methods to “follow the money” and find hidden assets or uncover financial misrepresentations. Here are a few of the techniques:
Bank account analysis: If the target business is cash based or cash heavy—such as a bar or restaurant, convenience store, laundromat, lawn service, or similar—hunting for missing cash is often a good place to start.
A look at the company’s bank accounts can reveal a lot about the company’s funds and cash flows. Do deposits reflect receipts, loans, insurance proceeds, and other payments? If not, where is the missing money?
Are there assets hidden in other accounts, maybe even overseas? Is the owner taking cash home or living above his or her means? Scenarios like these are all worthy of investigation.
Fraud investigation: Another area to search for missing assets involves occupational fraud. If an employee is embezzling or misappropriating business assets, proper examination of internal documents can uncover fictitious accounts, contracts and invoices, kickbacks, ghost employees and fake vendors, personal expenses, and fraudulent expense reimbursements.
This investigation also includes looking behind the financial statements to uncover misstated revenues, expenses, net income, liabilities, and asset valuations or misclassified cash flows and inaccurate financial statement notes.
Inventory assessment: An additional avenue to uncovering assets is by examining the company’s inventory. Understating the company’s inventory and cost of goods can make it appear more profitable. Determining how inventory is tracked and accounted for and illuminating discrepancies helps determine true inventory costs and realign margins.
Getting the Right Help
At Dembo Jones, our staff includes both individuals certified in business valuation and in forensic accounting. Working together, these individuals are able to seamlessly transition from valuation work to forensic accounting should the need arise. Their valuation and forensic accounting credentials are achieved and maintained through rigorous and continued education and training — backed by professional standards that include the requirement to maintain integrity and objectivity in every engagement.
You don’t want to be scrambling in the midst of an acquisition or litigation to assemble a team of experienced professionals. Retaining experts is essential early in the process to rigorously evaluate financial information, identify red flags, and take the steps to resolve them. Contact us today.