QUESTION: What can we do to spot a fraudulent financial statement? We have taken some sizable losses due to a customer inflating assets and omitting liabilities.
ANSWER: Each financial statement you receive should be contain language indicating the information is accurate and complete and be signed by the potential customer. The statement should be carefully scrutinized for gaps, incomplete data and information that "just doesn't look right". The ownership and value of assets, particularly those being relied on as a potential source of repayment of the loan, should be independently verified. Does the ratio of assets to liabilities make sense for the type of business the customer is conducting? A copy of the customer's tax return should be requested and compared to the data on the financial statement. The customer should be asked to fully explain in writing any discrepancies discovered from any source. All of these steps should take place prior to the loan commitment being made. In the event the borrower files bankruptcy the court could rule the bank really didn't rely on the fraudulent information and therefore the debt was dischargeable. These actions may not completely protect an institution from fraud but should reduce the number of losses.
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