Burning Bellatorum: The Story of a Forty Million Dollar Fraud and its Priceless Lessons for Investors and Entrepreneurs by Chris Bentley

Author:Chris Bentley [Bentley, Chris]
Language: eng
Format: azw3
Publisher: Chris Bentley
Published: 2022-04-06T00:00:00+00:00

#5 - Understand the incentive structure and review financials frequently

In many organizations, sales targets are linked to profits. To discourage fraudulent activities of a financial form, it is sometimes a good idea to not just tie the compensation of a salesman or trader with the profits he or she makes. In other words, if a certain kind of incentivization is likely to create a chance for fraud, ask how the firm manages to curb this. Some financial firms have a way to deal with this—for instance, by setting risk-adjusted targets and compensating people based on risk-adjusted returns. Further, there are some common ways in which most financials are fudged and some specific places where you can look for red flags. For instance, look for a sudden increase in Accounts Receivable (is the company being more aggressive than usual about what it needs to collect from customers?) Are gross margins falling, and if so, is there a valid reason that you’re being given? Are product inventories rising considerably quarter after quarter and not being sold? Is the firm inflating its earnings in any way (perhaps by lending money to its customers, or understating its expenses by spreading them out?) Is there a continuous, unreasonable amount of cash or current assets being stocked up? Are financial ratios very different from the industry norm? Dig in as much as you can.

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