In a recent article in Fortune Magazine about felon turned fraudfighter Sam E. Antar…. Sam gave the following tips to investors about looking for fraud in public companies. I think it’s sound advice!
Sam E.’s five rules for spotting potential fraud in public companies.
Study SEC filings yourself.
External auditors, audit committees, and Wall Street analysts cannot protect you from most fraud. Analysts often do not ask the important questions and are too quick to accept management’s representations.
Read the footnotes first.
Tiny things can be huge. In the Crazy Eddie fraud, the change of a single word (from “purchase discounts and trade allowances are recognized when received” to “recognized when earned”) allowed Sam E. to inflate the company’s earnings in fiscal year 1987 by about $20 million.
Watch for inconsistencies.
If the CEO tells the press, “We are profitable,” make sure the figures in the 10-Q back up the statement.
Always crosscheck disclosures.
Compare Management Discussion & Analysis in the current report with MD&A sections in past 10-Qs. Look for any changes in disclosure language.
Sound like too much work?
If you don’t have the time or expertise to do the above, don’t buy individual stocks. Stick with index funds.