Detecting circular cash flow: healthy doses of skepticism and due care can help uncover schemes to inflate sales.
Journal of Accountancy › Vol. 208 Nbr. 6, December 2009
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Detecting circular cash flow: healthy doses of skepticism and due care can help uncover schemes to inflate sales.
EXECUTIVE SUMMARY
* Companies using asset-based financing ere particularly prone to fraud involving the inflation of working capital assets because this increases the company's ability to borrow cash. Asset-based financing typically includes a revolving line of credit collateralized by working capital assets of the company, with cash available based on a set advance rate for each eligible asset class (accounts receivable, inventory, etc.). * One largely undocumented fraud scheme that has caused millions of dollars in losses to lenders is the use of a circular flow of cash to artificially inflate accounts receivable and sales. This fraud scheme involves cycling cash between numerous shell companies or colluding parties to give the appearance of increasing revenue and receivables. * Professional skeptic...See the full content of this document
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