May 31, 2019

Identifying M&A Fraud During Accounting Audits

Identifying M&A Fraud During Accounting Audits

Merger and Acquisition (M&A) activity has been increasing every year with no signs of slowing down. As companies look to grow, diversify, and find synergies with other companies, accountants performing M&A audits need to do their due diligence to protect against fraud.

Fraud Factors to Consider

When auditing a potential target or conducting due diligence, accountants must carefully analyze information about the company’s assets, liabilities, revenues, and profits to determine they don’t reply upon false estimations. Here are areas of interest to review when conducting an audit:

  • Unusually large inventory upsurge
  • Significant sales volume at quarter or year end
  • Unusual gross margin discrepancy
  • High customer concentration
  • High senior executive turnover rate
  • Year-end management bonuses boosted on profit


Safeguarding Your Accounting Business

In addition to protecting the company they’re auditing, accountants should always make sure to protect themselves. Being associated with a company guilty of fraud could damage an accounting firm’s reputation. The following actions can help mitigate liability:

  • Always make sure work is backed up, especially if performing due diligence on a target that is showing signs of potential fraud.
  • Ensure ledgers and old balances are in full compliance with US Generally Accepted Accounting Principles.
  • Present any historical financial information in a fair, accurate, and reliable manner for the company’s Confidential Information Memorandum.
  • Have a full understanding of the provisions of the sale agreement from its initial draft to subsequent revisions.
  • Have a standing engagement letter drafted for the company, stating precisely what the accountant is solely responsible for.

Getting the right insurance coverage is another way to safeguard your business. ProSight helps to protect accountants with unique products and solutions customized for the accounting industry that go beyond traditional insurance coverage.

Christopher De Puy, Value Creation Executive for Accountants