Myth of Retail Sales in Multi-Level Marketing

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Multi-level marketing companies (MLMs) like to refer to themselves as “Direct Sales” companies, because this puts the focus on the sale of the product or service, and takes focus off the business of recruiting.

I’ve been researching MLMs for years, and I’ve found that companies use the product or services simply as bait and a cover. It is “bait” for recruiting because it looks legitimate to a potential recruit. (How many people would join MLMs if they were truthful and told you that what you really had to do was constantly recruit new people?)

It is a “cover,” since it is what makes the schemes legal under state and federal laws. Pyramid schemes (which are simply a transfer of money up a pyramid-like structure) are illegal. But if you use a legitimate product or service as your cover and your reason for transferring money up the pyramid, you can successfully claim that your company is not a pyramid scheme. Again, the product or service takes the focus off recruiting.

But the truth is that the people involved in multilevel marketing companies do little actual retailing of products or services to third-party customers (non-members of the scheme). The vast majority of the purchases of products and services are made by the members of the MLMs themselves, either to stock inventory (which they will probably never be able to sell) or for personal consumption. Continue reading

Comparing MLM and Corporate America

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Fans of multi-level marketing (MLM) often say that it is just like corporate America! There are levels of employees and managers… Corporate America is a pyramid and MLm is no different. That’s a faulty analysis. When I call MLM a pyramid scheme, I am not calling that because the management structure looks like a pyramid. I am calling it a pyramid scheme because of how it functions.

A pyramid scheme is a pay-to-play scam. People pay to become a part of it, and they pay continually through minimum purchases that are required to remain a qualified member of the scheme. MLM is based on the continuous recruitment of people into the scam using the promise of making money, despite the fact that more than 99% of participants in MLM actually lose money. MLMs sell a fake opportunity. While they appear to be focused on selling products or services, those things are simply a front to make the “opportunity” look like a legitimate business. Sadly, MLM is not a business. Continue reading

Divorce Financials: Dangers of an Imprecise Premarital Agreement

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divorceA divorcing couple has a premarital agreement, so everything is simple when it comes to dividing assets and paying maintenance, right? Of course not. Premarital agreements are rarely simple, and they become even more complicated when the language in the agreement is imprecise.

This high net worth divorce case study provides some important insights into the process of completing a lifestyle analysis and calculating support. In this case, an imprecise premarital agreement led to problems in analyzing the marital lifestyle, excluding certain questionable expenses, and calculating future needs.

Marital Standard of Living
Premarital agreements typically speak to the factors to be considered in calculating maintenance, including the length of the marriage, the method for calculating the spousal support, and the lifestyle or the marital standard of living of the couple and their children. Unfortunately, there are many situations that are never contemplated when premarital agreements are written, so they aren’t addressed in the agreements.

The most hotly contested area is the standard of living, as this item is often elusive and subjective. In our high net worth divorce case study, the parties’ premarital agreement provided that the recipient spouse was to receive spousal support for three years in an amount to support her in the standard of living enjoyed by the parties during the last three years of the marriage. Continue reading

Detecting Overrides of Internal Controls

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Where can employees, outside consultants, and board members look for evidence of override of internal controls? This isn’t a simple list of numbers or documents that must be checked off. Instead, looking for improper override of controls requires looking for red flags that point to something being amiss.

  • Complete an analytical review, looking for unusual changes between periods in terms of dollars and percentages.
  • Look for large, round numbers that enhance the financial position, especially if these numbers just happen to occur at the end of an accounting period
  • Examine reversing entries at the beginning of an accounting period, looking for evidence that these entries relate to an improper entry at the end of the previous period
  • Determine whether transactions have been completed on an arms’ length basis, and with legitimate business partners
  • Look for evidence of undisclosed relationships or agreements
  • Listen carefully to employees who may be reporting wrongdoing or hinting that there is a problem

Continue reading

LuLaRoe Review: Bad “Business”

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lularoe-scam-fraudLuLaRoe leggings have become popular, and therefore the multi-level marketing (MLM) “business” of LuLaRoe has taken off. I’ve said over and over that multi-level marketing is not a business because more than 99% of participants lose money. But I wanted to take a look at this company specifically, because it’s been getting so much press.

Business Insider promoted the idea that LuLaRoe is making women rich. While there ARE a handful of women who are making a ton of money from the company, only an incredibly tiny fraction of participants can make this type of money. Why? Simple math. If you’re making a 3% to 5% commission on your downline (as you’ll see below), it takes $700,000 of wholesale purchases by your downline to earn $35,000 in a month. (I realize that various bonuses change the math, but I’m using these numbers to simplify things.)

Imagine how many people need to be in the downline and how much they each need to buy to generate this volume. Simple math tells you that everyone below the woman earning $35,000 can’t build a pyramid of this size. There simply aren’t enough people on the planet, and there are only so many customers available for each distributor.

Let’s talk about some of the specifics downfalls to this fake business. Continue reading

Suing Auditors for Malpractice (And Winning!)

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Winning a case against an auditing firm when there is a sizeable fraud (such as the Koss Corp. embezzlement) or the collapse of a Ponzi scheme (such as the Bernie Madoff case) is not easy. Simply because there is a fraud, a business failure, or a pyramid scheme collapse, the auditors are not necessarily at fault.  The auditors may have carried out their professional responsibilities exactly as they should have, but they still did not uncover the fraud.

How does a fraud go undetected by auditors? The first thing to remember is that audits are not designed to find fraud, so they rarely do. Equally important, is the fact that frauds are deliberately (and often effectively) covered up by those perpetrating them. Particularly in the case of executives embezzling or perpetrating financial statement fraud, they are keenly aware of exactly how the auditors do their work, and take careful steps to avoid detection.

Technically speaking, auditors are not engaged to find fraud. They are engaged to give an opinion on the financial statements, and whether they are fairly stated. The auditors are required to perform certain procedures related to fraud, essentially assessing the risk of fraud and increasing the testing of the financial statements as there is a greater perceived risk of fraud. The auditors are not specifically engaged to (or expected to) find fraud, under the current auditing standards. Continue reading

Divorce Financials: Analyzing Income Tax Returns

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Income tax returns are an important piece of financial information in a divorce or child support case. There is so much information that can be obtained from the tax returns, and if we have several years of data, we can make comparisons from year-to-year. In the video below, Tracy talks about the financial data she analyzes on the income tax returns and what these items may tell us about the financial situation of the family.