Just like GoMechanic, Mojocare’s founders also recently admitted that they were misreporting revenue and fudging numbers, under the pressure to inflate GMV after raising $20 Mn in August 2022.
Now, as a Financial Due Diligence professional, how does one find out Fictitious Revenue.
For the uninitated, Fictitious Revenue is revenue that was booked without actually rendering the services or supplying the goods. This might involve round-tripping of funds via inventory sold to relatives, creating fake invoices etc.
One potential red flag is the revenue growth - in case of Mojocare, revenue zoomed to INR 12.12 Cr in FY22 from a mere INR 32 Lakh in FY21 i.e. 38X in 1 year.
You have to assess the change in Debtors - ageing will help in it, insist on balance confirmation from Debtors, look at the revenue mix - volume and price data analysis to find, say, that unusual surge in sales by a minority segment of units etc., perform vouching on the selected sample transactions - checking the trail from point of customer orders to the dispatch document to see if such sales transactions really occurred.
SA 240 - The Auditor’s Responsibility Relating to Fraud In An Audit Of Financial Statementsn could be a good read in this context
Anurag Singal is a Chartered Accountant, a graduate from IIM Ahmedabad and IBBI Registered Valuer. He can be reached at email@example.com