A horrifying story of deceptions

It is a dangerous world. 
The owner bought a profitable business. Within three months the business collapsed.

I meet two men who sold the business at a seminar I was taking.

They had been in Australia and their business was is serious trouble. Their solution was to fictionalise the figures.

The method was deceptively simple.

They started twelve months before listing the business for sale. To make the business more profitable they took out their drawings and rebanked them as sales. As they grew the sales this way, they accelerated the rebanking of drawings. Soon they were showing a business with growth in sales and increasing profitability. Within six months their accounts showed they had a sellable business. Now all they needed was the victim.

There are some frauds so well conducted that it would be stupidity not to be deceived by them.
— Charles Caleb Colton

It was important that the buyer was ignorant to the state of the industry. Being from NZ they looked for a recent immigrant who would know little of the industry or the region and would accept the financial figures as accurate. And it helped a lot that they victim could empathise with them, after all they were both NZers.

To make the business even more attractive, they told the victim of all the cash they were not banking. They had a note book to support this. With this the deal was quickly done and the two sellers were gone.

The business failed. The owner lost his $250,000.

Could anything have been done?

The owners faked the numbers, banking capital introduced as sales, forcing sales to rise, when the opposite was the case. The difference was so unexpected and large that it destroyed the business.

The owners faked the numbers, banking capital introduced as sales, forcing sales to rise, when the opposite was the case. The difference was so unexpected and large that it destroyed the business.

Here we enter into speculation. But two things could have been done by the buyer. Request two or three years worth of trading. It is unlikely that the faking could have gone on for such a long period of time.

Ask for invoices from the suppliers. If the business was growing the business would have been buying more stock.

What about the signed off annual accounts?

The annual reports in NZ and Australia for small privately owned operations are not usually audited. Having a chartered accountants letterhead does not by itself offer increased protection. Accountants disclaim their accounts with the warning that their figures are compiled from information provided by the client and further add that they are not audited.