CHAPTER 9Organizational Warning Signs and Nonfinancial Indicators

In the business world, the rearview mirror is always clearer than the windshield.

—Warren Buffett

9.1 WARNING SIGNS BEFORE A FRAUD OCCURS

Using the door to fraud, we can identify warning signs related to the organization, before a fraud occurs.

Motivation

There may be managers interested in showing that the company is doing better than it actually is. This can be due to a number of factors:

  • To avoid having difficulties obtaining financing.
  • Companies with loans that have cancellation clauses. They are companies that have to accomplish certain requirements in their accounts (profits, debts, liquidity, etc.) to prevent a bank loan being rescinded in advance. In these cases, there is more pressure for the accounts to reflect that the conditions agreed on are met.
  • Companies in which analysts and rating agencies' opinions are worsening.
  • To avoid reprobation or dismissal, in companies that exert a strong pressure to meet certain goals or budgets that very ambitious.
  • To receive a bonus. According to PricewaterhouseCoopers (2010), this is the main incentive to commit frauds in companies.
  • When a manager is soon leaving the company, there might be interest in transferring problems to those who'll take the reins in the future.
  • A company that has to be sold in the near future. In these cases, sellers may be interested in offering a better image that raises the selling price. This can also happen in the IPO (initial public ...

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