old school value
protect yourself from stock frauds
checkpoints to find stock fraud

You will be surprised at the number of companies that participate in financial shenanigans.

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Checkpoints to Find Stock Fraud

This extensive list is not required as a check for every stock.

However, this checklist to find stock fraud will become second nature with practice. 

Or better yet, identify the investing fraud items you feel is important and then add it to your own analysis checklist. 

Be alert for misguided
management incentives

Watch for poor internal
accounting control

Question overly liberal
accounting ruless

Watch for qualified
opinions

Favor companies with
conservative accounting policies

 

Be alert for aggressive
inventory valuation

Consider the
significance of pending
or imminent litigation

Question long term
purchase commitments

Watch for changes in accounting principles
 

Read the letter from the CEO with a grain
of salt

Focus on management and its estimates

Be wary when the
auditor and/or lawyer
resign abruptly

Watch for early
shipping, before sales occurs

Weigh uncertainties of companies using
the percentage of
completion method

Look for improper use of the percentage of
completion method

Check whether the risks and the benefits have transferred to the buyer

Determine whether the buyer is likely to return the goods

Check if the buyer has financing to pay

Determine whether the customer is obligated
to pay

Watch for hasty
recognition of franchise revenue

Question how retailers account for returned goods

Be alert for revenue recorded on the exchange of property

Determine whether management estimates are realistic

Watch for the sale of pooled assets acquired in a business combination

Be alert for tricks with LIFO pools

Watch for gains from the sale of undervalued
investments, including real estate

Don’t be fooled by
profits from retiring debt

Adjust for the mixing
of gains from recurring
and nonrecurring
activities

Watch for co-mingling of operating and
non-operating income

Be alert for companies hiding losses as
“non-continuing”

Watch for the capitalization of start-up costs

Consider the propriety of capitalizaing R&D costs

Look for companies that capitalize advertising

Watch for companies
that capitalize adtministrative costs

Question companies that depreciate fixed assets too slowly

Be alert for lengthy amortization periods

Be concerned when the depreciation or amortization period increases

Watch for bad loans and other uncollectibles that have not been written off

Be wary of worthless investments

Ascertain that cash received has
been earned

Probe for a troubled
company with fixed
payments

Watch for unrecorded post-retirement liability

Read debt covenants carefully for
contingencies

Examine any debt for equity swaps

Be wary of companies using subsidiaries for borrowing

Watch for defeasance of debt

Be critical of successful companies with large reserves

Be alert for prepayment of operating expenses

Be concerned when the depreciation or amortization period decreases

Use cash flow analysis to measure quality of
earnings

Compare growth in
sales with growth in
inventory

Compare growth in sales with growth in
receivables

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