The Next Wirecard? 20 Things To Watch For To Spot A Massive Market Fraud
German payments processor WIRECARD AG/ADR (OTC:WCAGY) has been one of the biggest investment disasters and potentially biggest financial frauds in recent history after the company revealed that more than $2.1 billion in cash had gone missing from its accounts.
One of the few firms that saw the writing on the wall for Wirecard was Mirabaud Securities analyst Neil Campling, who placed a $0 price target on the stock.
Red Flags To Watch
Campling recently came up with a list of 20 warning signs investors can look out for to spot the next massive financial fraud in the stock market:
- Extremely promotional CEO that is always seeking publicity.
- CEO and/or senior management with massive compensation packages tied to sales growth or stock price rather than cash flow or earnings.
- Management compensation that is well above peers, even if the company is less profitable.
- Aggressive future projections that are consistently proven to be too optimistic over time.
- Questionable product quality or lack of technological advantages over competing products.
- Self-certification of financials via mechanisms such as international subsidiaries, lack of third-party auditing or utilizing creative accounting to generate late-quarter surges in revenue.
- An unusual or unverified level of Receivables due to the company receiving cash up front for future deliveries.
- Signs that the company has a shoestring budget and struggling to pay suppliers, employees, leases, etc.
- Unusual trends in margins, such as margins staying flat or increasing despite large investments in global expansion and lower average sales prices over time.
- Rising gross debt levels and cash balances that are not matched by interest income.
- High employee turnover, especially in the accounting and legal departments.
- Aggressive retaliation against or dismissal of critics or third parties seeking additional information about the company.
- Dislike of hedge funds.
- Signs of narcissism from the CEO.
- A growing group of critics whose opinions are dismissed due to the stock’s strong performance.
- Growth stocks with slowing top-line numbers and/or unsustainable market shares.
- Lack of profitability or inconsistent profitability.
- Extensive use of non-GAAP accounting, one-off items and unusually large credits.
- A weak board that is beholden to the CEO, including family members.
- Media and analyst targets that factor in products that are at least five years away from having any meaningful impact.
As Whitney Tilson said in a recent newsletter, Campling’s list has “obvious parallels” to Tesla Inc (NASDAQ:TSLA). However, even if Campling was specifically crafting the list with Tesla in mind, the factors he included are also universal potential red flags when it comes to investors identifying when companies like Wirecard may be too good to be true.
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