Siphoning Out of Funds

Distinguishing exaggerated expenses or business losses from underlying techniques of siphoning out of funds

There are also ways and means adopted by perpetrators of fraud for duping investors and equity partners or potential acquirers of business. Exaggerated incomes, sales, receipts, and /or deflated expenses are very possible. This is done with a view to improve the share price at the time of takeover.

There are ingenious ways of doing this. In one unique case, where the takeover of a business was to be spread over three years, the previous management was told that company taking over had a norm of permitting a maximum of 3% loss on account of rejections or wastage.

However little did that company realize that it gave away an important piece of information-that is tolerated 3% rejection which was much higher than that of the previous management whose company was being acquired was much lower at about 0.25% because of slightly better kind of machine.

Needly to state the previous management exploited the situation fully and during the phase wise takeover period in 3 years during which they smoothly and covertly creamed off the difference of 2.75% rejection which in absolute terms ran in to several crores of rupees.

Such malpractices can happen in myriad number of ways. How can one really spot these manipulations? Admittedly it is very difficult. However, these need lucid thinking and a multi-pronged approach. Apart financial and legal due diligence, there need to be certain important factors to be probed into for each industry- gross margin, wastage, yield and inventory ratios etc.

More importantly the due diligence must continue even during the takeover process( using intelligence agencies), and for some time after the takeover till such time that the new management time completely takes over. This is to Protect and inform the new management of business diversion, opportunities lost or transferred to other entities, and other abuses which take place in a big place in a big way even though old loyal employees. Use of ‘moles’ as employees, suppliers or third parties can also be useful.