5 fraudulent modus operandis that investors must be aware of


5 fraudulent modus operandis that investors must be aware of

fraudulent modusWith the rise of numerous business startups in recent times, there are now more opportunities for investors to grow their capital. By investing in these startups, investors aim to earn substantial passive income.

But nothing in this world is that easy. Before making an investment, investors need to ensure that their funds are going to the right companies and must steer clear of fraudulent schemes. Losses due to investment fraud, as in the case of Outcome Health, should be anticipated and prevented at the outset.

Lessons learned from Outcome Health 

Outcome Health was a healthcare technology company that provided digital advertising solutions in medical waiting rooms. In 2017, the company was valued at $5.5 billion and was considered one of the fastest-growing startups in Chicago. However, in 2017, Outcome Health was accused of fraud.

The fraud allegations came to light after a Wall Street Journal investigation, which discovered that Outcome Health had lied to advertisers about the number of screens showing their commercials. Significantly, this fraudulent investment took a toll on some prominent investors, including Goldman Sachs, as well as Alphabet’s GV, Balyasny Asset Management, and CapitalG.

After 10 weeks of trials, a federal jury finally convicted three former Outcome Health executives—former co-founders Rishi Shah and Shradha Agarwal and former chief operating officer and chief financial officer, Brad Purdy—for their roles in fraudulent schemes of up to $1 billion.

Fabricated financial reports

Based on the results of an intensive search, it was uncovered that the modus operandi of fraud carried out by the company was the falsification of financial reports. Such fraudulent financial reporting has severe consequences for companies and investors, leading to financial loss, legal action, and reputational damage.

There are several methods that are generally used in falsifying financial reports, including:

  1. Overstating income or assets.

This method was used by the defendants in the Outcome Health case. According to the Justice Department, Purdy inflated the earning figures to attract investors.

  1. Understating expenses or obligations.

This method is usually carried out by not recording expenses or obligations, such as unpaid debts or taxes, thereby making the company’s financial position appear stronger than it really is.

  1. Manipulating reserves or allowances.

Misusing reserve funds or allowances set aside to cover potential losses or expenses.

  1. Improper disclosure.

This is when the report does not disclose important information, such as related party transactions, significant changes in accounting policies, or other events that could affect the company’s financial position.

  1. Channel stuffing.

Shipment of products in excessive quantities to distributors or customers at the end of the reporting period to increase sales figures, thereby giving the impression that the company’s performance is better than it really is.

Poor due diligence 

The Outcome Health case is not the only fraud case that took a toll on prominent investors. Many other cases, including the Theranos, Wirecard, FTX, and Frank cases, serve as constant reminders that even prominent investors can be susceptible to fraudulent investments and highlight the importance of performing thorough due diligence.

Learning from the cases, some of the factors that may have contributed to the failure of due diligence by prominent investors include:

  • Over-reliance on reputation. In the case of Outcome Health, the co-founders, Rishi Shah and Shradha Agarwal, had reputations for being successful entrepreneurs, which may have influenced the investors’ decision to invest in the company. Their “gleaming” reputations may have led to an oversight of the due diligence process.
  • Inadequate investigation. Investors may not have conducted a thorough investigation of the company’s finances, operations, or internal controls. They may have relied on superficial information or conducted a cursory review of the company’s documentation.
  • Failure to identify red flags. Investors may have overlooked potential warning signs such as unusual accounting practices or inadequate internal controls. These are all warning signs that may indicate fraudulent activities or unethical behavior within a company.

Unfortunately, not all organizations have the resources and special competencies to conduct comprehensive due diligence on companies that they are about to invest in, acquire, or merge with. Therefore, the option of collaborating with a third-party company providing due diligence services needs to be considered.




Image by Freepik

Share this post:



Jl. RS. Fatmawati Raya No. 57-B, Cilandak Barat, Jakarta 12430, Indonesia







Get the latest updates and industry insights

    Copyright – INTEGRITY – All Rights Reserved © 2024 – Privacy Notice | Terms of Services | Content Protection by DMCA.com