Financial Due Diligence - Fictitious Revenue



Quick Summary
Fictitious revenue, where sales are booked without actual goods or services being provided, is a serious concern for businesses. Recent cases highlight the pressure founders face to inflate numbers, especially after securing funding. Financial due diligence professionals can uncover this by scrutinising revenue growth, analysing debtor ageing and confirmations, examining revenue mix for unusual surges, and performing transaction vouching from order to dispatch.

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.

Detecting Fictitious Revenue: A Due Diligence Guide

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 anurag@betafinpartners.com


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I am a CA and graduated from IIM Ahmedabad in 2015. Worked for 10 yrs across across the likes of Deloitte,ITC Tata Steel. Our startuphttp://cajobportal.com/ is Indias first recruitment website for Chartered Accountants For Careers Guidance, do watch this channel Anurag Singal YouTube 38,000+ subscribers in June19 ... Read more

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