Concerns About Potential Fraud
I’m currently involved in M&A transaction advisory (non-CPA) and we’re conducting a review of a commercial HVAC company on behalf of a financial sponsor. As we analyzed their financials, we noticed that at the end of Q4 2024, there were several last-minute invoices issued. One key question that stands out is: why would a customer have lifetime revenue that is lower than their accounts receivable? While there are additional issues to address, this particular discrepancy is puzzling me. Any insights would be appreciated.
One response
It sounds like you’re dealing with a complex situation, and the discrepancy between lifetime revenue and accounts receivable (A/R) is indeed a red flag. Here are a few possibilities to consider:
Timing Differences: If the company recognizes revenue on a different schedule than it collects cash (e.g., long-term contracts), it could lead to higher A/R while lifetime revenue appears lower. This might be common in HVAC companies, especially for service contracts.
Invoicing Practices: The presence of last-minute invoices at the end of Q4 could indicate aggressive revenue recognition, perhaps an attempt to meet financial targets. If customers have not yet paid, this could inflate A/R compared to recognized lifetime revenue.
Customer Defaults or Delays: If customers are consistently delaying payment or there’s a pattern of defaults, it may mean that while the company records the revenue, the actual collectible amounts are lower, resulting in high A/R.
Billing Errors: There may be discrepancies in invoicing that leads to inflated A/R, such as duplicate invoices or incorrect billing amounts that have not been resolved.
Sales Returns or Allowances: If there are significant sales returns or allowances that reduce actual revenue but not A/R, this could explain the discrepancy.
Unreported Revenue: In some cases, there may be instances of unreported or underreported revenue that has not been recognized properly in financial statements.
Contractual Terms: Review the terms of customer contracts. Some contracts might allow for extended payment periods that could contribute to higher A/R without corresponding revenue.
Economic Conditions: Broader economic factors could impact customer payment behavior, potentially leading to higher A/R if customers are facing financial difficulties.
It’s essential to dive deeper into the company’s Accounting policies and customer payment records to understand these discrepancies more clearly. Assessing historical payment trends and comparing them to industry averages might also provide additional insights.