Where is a lender most likely to look for evidence of fraud in financial statements from a borrower?

When lenders analyze financial statements for potential evidence of fraud, they are particularly attentive to the recognition of revenues, as this area can be significantly manipulated to present a more favorable financial position. Including contingent sales in revenues stands out because this practice can falsely inflate the revenue figures by claiming income that may not be realized or guaranteed. This type of revenue recognition is often seen as aggressive accounting, and it can signal to lenders that a borrower may be attempting to mislead or present a misleadingly strong financial stance.

Lenders are cautious about how income is represented on financial statements because it directly impacts their assessment of the creditworthiness of a borrower. If a company includes potential or contingent sales—which may not occur—the reported revenue may appear much higher than what is reliably expected. This discrepancy could raise alarms for lenders reviewing the company’s ability to service its debt and fulfill loan obligations.

A focus on how revenues are reported allows lenders to gauge the reliability of a borrower's financial health, making the inclusion of contingent sales in revenues a red flag for potential fraudulent behavior.