Detecting Corporate Fraud - SABEW Conference Session by Roddy Boyd

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Roddy Boyd, founder of the Southern Investigative Reporting Foundation, presented a one-hour "Detecting Corporate Fraud" session during SABEW's Spring Conference, March 29, 2014. Sponsored by the Donald W. Reynolds National Center for Business Journalism, the training focused on using SEC filings and other corporate disclosures to identify investigative stories.

For more information about training for business journalists, please visit http://businessjournalism.org.

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Detecting Corporate Fraud - SABEW Conference Session by Roddy Boyd

  1. 1. Title Slide If You See Something, Write Something Roddy  Boyd,  founder   Southern  Inves3ga3ve  Repor3ng  Founda3on       SABEW  conference,  Bal3more,  Md.,  March  27,  2014  
  2. 2. Boyd Roddy Investigative reporter and founder of the Southern Investigative Reporting Foundation. He has worked for Fortune Magazine, the New York Post,The New York Sun and Institutional Investor News; founded The Financial Investigator website; and wrote "Fatal Risk," on the collapse of AIG. An independent nonprofit, SIRF provides document-driven investigative and accountability reporting on publicly traded companies. Twitter: @boydroddy   Web: SIRF-online.org
  3. 3. What is corporate fraud? A few kinds of corporate fraud • Securities fraud • Ripping off investors • Consumer fraud • Ripping off (retail) customers • Tax fraud • Ripping off taxpayers (that’s you) Bottom line: Fraud boils down to to saying one thing and doing another, for profit. One definition: “Business fraud is, very simply, fraud in any business activity that resorts to deceitful practices to cause economic injury.” -- Cochran law firm (plaintiffs’ attorneys)
  4. 4. Things That Make You Go Hmmm •  Logic Leaps •  Cash is King •  Manias of the Moment •  We Take Care of our Own Image:  Wikimedia.org  
  5. 5. Logic Leaps Save Suspension of Disbelief For The Movies Does What They Say Make Sense? • Spectacular Results • Taking on Entrenched Competitors • What The Hell?
  6. 6. Spectacular Results It’s not easy for large companies to grow massively • Ex: Merrill Lynch 2005 earnings • http://tinyurl.com/kg7racw • 33% Rev boost = Massive risk! Common Sense is most uncommon Image:  Jack-­‐Benny,  hJp://flic.kr/p/ePdxxP  
  7. 7. Dancing With The Big Boys •  Watch for WCOM: Fast Rising in Brutal Industries •  How Come No One Thought of it Before? •  Are Independent Experts Wowed or Impressed? •  Common Sense: Killing a King Ain’t Terribly Easy
  8. 8. Cash Is King !   No doubt about it, companies not generating cash over time are in hot water. At some level, the inability to generate cash is involved in 99% of frauds. Image:  Jack-­‐Benny,  hJp://flic.kr/p/ePdxxP  
  9. 9. Basics: Cash Flows Key points: • Find Statement of Cash Flows in 10-K, 10-Q • Check to see if company can generate cash • Look to see if company is “living in the market” • Discern trends, if possible Example • United Continental’s Conundrum (p.62): http://tinyurl.com/qx4r2yw   Example: • Google’s sweet spot: http://tinyurl.com/pgxymdf
  10. 10. When the Cash Generator Breaks... When companies can’t, over time, generate cash they have to: • Access the markets by stock and debt sales • Dilution, interest expense and debt loads • Markets shut down (1989, 1994, 1998 & 2007-2008) • Asset Sales • Delayed Investments (Lower Cap-Ex, Maintenance) • Expense cuts
  11. 11. Manias and Fads Companies in Manias are definitionally at a higher risk for wrongdoing • Pressure to last beyond boom cycle • End of a mania is a brutal reckoning • Watch for late stage mania co’s e.g. Pets.com • Manias are funding grabs, pure and simple
  12. 12. Look for incongruities
  13. 13. We Take Care of Our Own •  Related Party Transactions •  10-Ks and especially Proxy (Def-14A) filings •  Why have an RP for SOP deals? •  Major red flag: RP receivables •  Don’t sweat a relative (usually) •  Look for “once removed” RPs, like real estate •  Hidden RPs: board consulting deals
  14. 14. Son of Related Parties: Perks •  Rank Excessiveness •  Hidden Comp: Well into six figures annually •  ProTip: Look for “Gross Up,” or paying tax bill •  Compare to others CEOs, corp. Stock Px Perf. •  Disclosure vs. Non-Disclosure •  Has the company been in a period of downsizing? •  Unexplained & poorly explained capital raises

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