Study: Are Investors Really Aware of Signs of Fraud?

 Posted on November 05, 2015 in Estate Planning

When it comes to investing your money, do you know what warnings to watch for that could be indicators of fraudulent activity? A recent study reveals that many seasoned investors may not be aware of the signs that could spell financial loss—possibly even disaster—for an unsuspecting investor.

The study, titled "Understanding Investor Perceptions of Financial Statement Fraud and Their Use of Red Flags: Evidence from the Field," was conducted by researchers from George Mason University, North Carolina State University, the University of Cincinnati, and the University of Virginia. A grant for the study was provided by Financial Industry Regulatory Authority (FINRA) Investor Education Foundation.

Surveys were given to 194 participants from 38 different states across the country. The gender of participants was split evenly between men and women, with the average age of between 40 and 49 years old. The average household income of study participants was between $60,000 and $90,000.

Each of these participants were nonprofessional investors; however, each also had a significant amount of experience in investing. In order to participate, each investor must have been involved with trading company stocks with the prior year, as well as reveal to researchers what the returns on their financial portfolios had been for the prior 12 months. The majority of participants had been involved in investing for approximately 10 years.

When it comes to protecting their investments and watching for fraud, survey participants tended to focus more on outside sources to detect fraudulent activity as opposed to a company's internal "sources." Participants cited activity such as litigation with which the company is involved, Securities and Exchange Commission (SEC) investigations, external auditors, and independent analysts as the gauge of whether or not a company presents a solid investment.

They admitted to not really paying attention to factors which are often key in detecting fraud, over outside sources, such as how big the company is and how long it has been in business, how much outside financing has the company borrowed, and management structure.

Another key red flag is often ignored—an unusual or sudden revenue spike. Instead, investors rely more on whether or not the SEC is scrutinizing the company. At this point, it is often too late and investors may take a large financial hit.

Working with experienced financial professionals can help ensure that your investments are protected. Moreover, it is additionally important have a solid estate plan in place for your family's financial future. If you have questions regarding the estate planning process please contact an experienced DuPage County estate planning attorney today to discuss what type of options will work best for your financial situation.

Sources:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1460820

https://news.ncsu.edu/2015/06/brazel-red-flag-2015/

http://www.accountingweb.com/aa/law-and-enforcement/study-fraud-savvy-investors-often-track-the-wrong-red-flags