Investment fraud costs Americans an estimated $40 billion each year. Virtually all Americans are familiar with high profile cases such as Enron, which cost investors over $7 million. The FBI investigates over 700 financial fraud cases each year, which has raised many concerns about the scruples of many large hedge funds and investment banking firms.
However, many Sonoma County residents aren’t aware of massive fraud cases that are taking place in our own backyard. A recently deceased Santa Rosa businessman is now suspected of orchestrating a $23 million investment scam, which illustrates the need for prospective investors to use professional bookkeeping services to analyze investment opportunities.
According to a recent post in The Press Democrat, Clay Stephens, the founder of the Warren Group, was once regarded as one of the most successful businessmen and altruistic philanthropists in Santa Rosa. However, after he passed away last month, a Santa Rosa bookkeeping services company found that Stephens may have scammed them out of millions of dollars. The alleged victims include many of his friends and family.
While the investigation is still ongoing, many investors feel devastated and betrayed. The case is tragic, but shows that every investor should work closely with a Santa Rosa bookkeeping services provider to ensure they don’t fall victim to a similar scam.
Investment fraud can take many different forms, but the symptoms are fairly easy to identify if you conduct your due diligence. Here are some ways that Santa Rosa investors can use a bookkeeper to avoid falling victim to a scam such as the one Stephen allegedly conducted.
Spot Inflated Earnings Information
Many companies try to lure investors with inflated income reports. It is virtually impossible to blatantly lie about income over a long period of time, but unscrupulous companies have found a number of ways to inflate these reports to mislead investors.
Accountants that reviewed data on the Warren Group haven’t accused Stephens of engaging in such fraud, but such signs may surface in the future, because earning manipulations are extremely common with firms that defraud investors. A 2002 review of documents from the Enron scandal found that the company was regularly reporting that income from asset sales was over 40%, which would have been a major red flag to any prudent investor.
You should always use a bookkeeper in Santa Rosa to identify these warning signs and make sure that the business model is sustainable. A seasoned bookkeeper can identify common signs of an investment scam.
Identify Debt Problems
It is never wise to invest in a company that is overextended. Every investor should carefully study the debt-equity ratio and financing strategies of a company before committing to it.
Accountants that reviewed Clay Stephens’s financial records found that he was in substantial debt. These bookkeepers claim that Stephens was using the proceeds of new investors to fund new business ventures, but was actually using the money to prop up his existing businesses. Stephens was also allegedly taking home equity loans on his million dollar estate to continue financing his business.
You should always carefully review a business’s financial records to identify these obvious red flags. A Santa Rosa bookkeeping services company would have identified these problems and prevented investors from losing their money.
Verify Veracity of Earning Promises
Stephens was a highly regarded businessman in Sonoma County, because people believed that he had a track record for getting results for local companies. Shortly after his death, Paul Payne of The Press Democrat wrote a post detailing how Stephens had supposedly helped raise $600 million for businesses throughout Northern California.
Stephens probably promised his investors substantial returns. However, anyone that reviewed his income statements would find that the company’s revenue reports didn’t support those promises.
While investment fraud has gained a lot more attention in recent years, its prevalence appears to have increased. A shrewd investor will always conduct their due diligence on a company, which requires them to carefully study its business model.
Fortunately, an experienced bookkeeping company can help identify any red flags. Please do not hesitate to contact us if you are considering investing in a new company and want to use our Santa Rosa bookkeeping services. We look forward to working with you!