TL;DR: This follow-up dives deeper into spotting manipulated financials. While cutting costs can inflate profit, sophisticated fraud often involves creating fake revenue through circular transactions with shell companies to build a more believable growth story. Watch Accounts Receivable (AR) closely – it balloons if fake profits aren't covered or if funds are being siphoned. A major red flag is when high AR suddenly drops while Fixed Assets (PP&E) or Long-Term Investments suspiciously spike, indicating an attempt to hide the inflated receivables. Ultimately, these schemes often collapse due to cash flow issues.
(Disclaimer: As stated previously, this series is for educational purposes to help you detect potential financial irregularities, not to teach fraudulent practices. Detecting and investigating fraud should be left to trained professionals.)
Hi everyone, James here again.
In the last post, we covered seven basic red flags that might indicate "cooked books." Today, we delve into more advanced, and unfortunately common, techniques used to create a misleadingly rosy financial picture.
While companies can try to boost profits by artificially reducing costs or expenses, this often raises immediate flags – cost or expense ratios become abnormally low and attract scrutiny. A more insidious approach, often considered the "royal road" ("王道") of financial manipulation, involves fabricating revenue along with associated costs to create seemingly "reasonable" operating profit growth.
Why focus on revenue? Because stock prices are largely built on dreams – the dream that the company will keep growing and profits will keep increasing. Fabricating revenue feeds this narrative directly, arguably better serving the goal of deceiving investors looking for growth stories. 😈
The Anatomy of Fake Revenue: Circular Transactions
How is significant fake revenue generated? Often, it involves complex schemes using non-existent inventory and a network of related or shell companies ("人頭公司"). Here’s a simplified conceptual example:
- The Setup: A company wanting to inflate its numbers ("FraudCo") arranges transactions with controlled entities (let's call them Shell A and Shell B).
- Round 1: FraudCo "buys" non-existent goods from Shell B for $1M (creating $1M Accounts Payable - AP). FraudCo then "sells" these goods to Shell A for $1.2M (booking $1.2M Revenue and $200K Profit, creating $1.2M Accounts Receivable - AR). Shell A might then "sell" the goods back to Shell B for $1.2M to close the loop on paper.
- Repeat: FraudCo then "buys" the same phantom goods back from Shell B for $1.2M, sells them to Shell A for $1.4M (booking another $1.4M revenue, $200K profit), and so on. This cycle can be repeated endlessly to generate almost any desired level of revenue and profit on paper.
- The Cash Shuffle: At some point, a cash transfer is often orchestrated to clear the offsetting payables and receivables between the shell companies. However, on FraudCo's books, the profit portion ($200K from the first round, plus subsequent fake profits) remains stuck in Accounts Receivable.
- Plugging the Hole: The final step? The boss or owner often needs to inject their own cash into the company, disguised perhaps as a capital contribution or loan repayment, to eventually clear that lingering fake profit sitting in AR. Why would they do this? If the manipulation successfully inflated the stock price, allowing the boss to sell shares at a high profit, using a fraction of those illicit gains to cover the accounting discrepancy is seen as a necessary cost to prevent the scheme from unraveling.
Accounts Receivable: Where the Fraud Often Hides
This brings us to a critical area to watch: Accounts Receivable (AR). Fake revenue schemes typically cause AR balances to swell dramatically for two main reasons:
- Accumulated Fake Profit: If the boss doesn't, or can't, immediately inject cash to cover the fake profit generated in each transaction cycle, this amount remains lodged within the AR balance, growing larger over time.
- Misappropriation of Funds: Bosses needing large sums for personal use (like stock market speculation) might exploit the timing of these fake transactions. They could arrange for FraudCo to pay its (fake) AP to shell companies quickly, while delaying the collection of the (fake) AR. This timing difference effectively allows them to siphon cash out of the company. The more cash is挪用 (misappropriated), the higher the AR balance climbs as the "collections" lag.
Naturally, excessively high or rapidly growing AR raises major red flags for auditors and investors alike.
The Shell Game: Making High AR Disappear
So, how do companies try to hide suspiciously large AR balances? By attempting to convert them into other, less scrutinized assets on the balance sheet. The main "solutions" involve transactions designed to shift the balance:
- Into Fixed Assets (PP&E): The company might purchase property, factories, or equipment from a related party at a grossly inflated price. The cash used for the purchase effectively clears some AR (if the seller is part of the scheme or remits funds back), shifting the inflated value into the PP&E account.
- Into Long-Term Investments: Similar to PP&E, the company might make questionable investments in other entities (often related parties) at inflated valuations to disguise the bad AR.
- Into Miscellaneous Assets: Sometimes, vague "other assets" categories are used to bury problematic balances.
The Key Signal: Be extremely wary if a company reports unusually high AR for several periods, and then the AR balance suddenly drops significantly in one period, while PP&E or Long-Term Investments show an abnormal increase during that same period without a clear, convincing business reason.
The Inevitable End: 10 Teapots, 9 Lids (十個茶壺九個蓋)
There's an old saying: "Ten teapots, nine lids" (十個茶壺九個蓋). It means you can shuffle things around, but eventually, you can't cover everything. These complex fraudulent schemes require constant juggling and, critically, cash flow.
Most companies engaging in large-scale accounting fraud eventually collapse not because the auditors definitively uncover every detail, but because they run out of cash (資金鏈斷裂 – the cash chain breaks). The schemes become too complex, the required cash injections too large, or market conditions change, making it impossible to sustain the illusion.
If you examine the annual reports of listed companies that have spectacularly failed in recent years, you'll often find many of the warning signs discussed in this series leading up to their demise.
好孩子不要學系列：「如何識穿做數：進階篇」
//本系列會說明一些常見的「做數」方法，但目的並非叫你學會「做數」，呢啲事留番俾受過訓練的專業人士就好。相反，這系列是為了讓你更有能力去發現舞弊的「蛛絲馬跡」。//
上回講到，有7招去拆穿「靚」數，今回將更深入地教大家如何拆穿可疑操作。
上市公司要創造利潤，最主要的方法就是透過創造收入。利潤主要透過「收入－成本－費用」來的，做數如果是透過減少成本或費用來創造利潤，會因為成本率或費用率異常低而俾人踢爆。透過創造收入及成本產生「合理的正常營業利潤」先係王道。
股票價格有很大的一部份是建立在夢想上，這個夢想就是公司會繼續成長，獲利會繼續增加。所以做數如果不透過創造收入的話，點對得住受騙的投資者。😈
創造收入的方式通常是找一批不存在的存貨，然後安排幾個人頭公司來交易這批貨。
例子如下： 做數公司先以100萬元，向B公司購入一批貨，然後將這批貨以120萬元賣給A公司，A公司接着再以120萬轉回給B公司，從而完成收入增加120萬、利潤增加20萬的做數工程。接着做數公司再以120萬元，向B公司買回這批貨，再以140萬元賣給A公司。如此重複再重複，重複又重複，就可以創造出要幾多有幾多嘅收入與利潤的財務數據。
之後透過一筆現金，將應收帳款與應付帳款對沖，對沖之後在應收帳款只會留下利潤，以上例第一筆交易來說就是20萬。最後一步就是老闆攞錢出嚟，將利潤這個缺口填咗佢。
老闆點解願意攞錢出嚟？如果做數目的，是要藉此拉抬股價賺錢。如果老闆真的因此賺到錢，他從賺的錢中拿一部份出嚟把洞補上，是以免東窗事發的應有之義。
「要注意應收帳款」
做數導致應收帳款大增（receivable) 的原因有二： 一、老闆若沒有即時拿錢來填虛假利潤，藏在應收帳款裏的虛假利潤金額就會越來越高。 二、應收帳款被挪用：炒股票需要巨額的資金，當老闆資金不足時，最簡單的方法就是，透過時間差攻擊：早付假交易中的應付帳款給人頭公司、晚收應收帳款方式，來挪用公司的資金去炒股。挪用金額越多，應收帳款金額就越高。
應收帳款過高，可能被懷疑做假帳外，也會引起核數師注意及嚴查。
「解決」的方法主要有3種：將「應收帳款」轉成「不動產、廠房及設備」、「長期投資」、「現金」及雜項資產。
如果公司的應收帳款不合理，但應收帳款突然在某一個時點消失咗，而「不動產、廠房及設備」卻大幅增加，有可能是以高於市價方式購入資產（例如設備），迂迴地將過高的應收帳款轉入此會計科目了。
10個茶壺9個蓋。大部份做數做到收皮嘅公司都係因為資金鏈斷裂，大家有興趣攞最近幾年出事嘅上市公司嘅年報睇吓就會發現全部都有以上徵兆。
Understanding these patterns isn't about paranoia; it's about responsible leadership, diligent investing, and maintaining the integrity of our financial systems. Look deeper, ask critical questions, and never stop learning. Stay vigilant.
