We discovered numerous inconsistencies in reviewing one company’s financial statements. Of greatest concern was sales were overstated by nearly 25% in both 2020 and 2019. We traced the issue to the company’s outside CPA's, who had erroneously recorded year-end journal entries double-booking sales. As a result, our engagement was expanded to review the accountant’s work and year-end adjustments and the company had to restate its financial statements, delaying the transaction.
Additional red flags we identified and advised on included:
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The company reported significant year-over-year growth from 2020 to 2021, purportedly from pandemic-related pent-up demand and supply chain issues. We analyzed pre- and post-Covid results and verified sales and backlog demand.
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The company had a significant customer concentration, with one customer accounting for 95% of sales. We helped the buyer document a quasi-SWOT analysis and mitigating factors to gain comfort with the customer concentration.
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The company did not report inventories on its balance sheet, even though inventories existed, creating a dilemma for addressing the quality of earnings, inventory valuation and working capital. We proposed adjustments and provided recommendations for post-close accounting and borrowing base reporting.