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Companies That Dupe Investors: How to Identify Them

Making an investment decision on a particular company can take a considerable amount of time because you need to do a thorough assessment to determine its viability.

However, many companies are looking to dupe investors’, especially with a “get rich quick” idea. For instance, the Ponzi scheme successfully deceived the public with organizers promising high returns on your investment with minimal or no risks.

Investment frauds are also increasingly moving online, making it more difficult for the authorities to detect them. As an investor, you need to look out for any warning signs such as false financial statements, abnormal profits, false management claims, and more. Read on to gain more insights on how to identify such unscrupulous companies.

Financial Statements

Any investor should evaluate essential performance indicators of a company to help them make a sound investment decision. Fraudulent companies will try to develop false financial statements that reflect unsustainable profits. Follow the link to learn more about false financial statements and the law.

The Enron scandal, an American energy company, is one of the most well-known cases in the United States. The firm’s management misled investors and profited by about a billion USD by employing a market-to-market (MTM) accounting method. There are a number of reasons why they took on this strategy. First of all, profits can be listed as simple projections, instead of actual numbers. Secondly, assets from the balance sheet are not limited to book values, they can also be recorded at their fair market value. When the scheme finally collapsed, it did not only affect their employees but also caused many investors’ bankruptcy.

Market Returns

Every investor would love to make huge returns, and every company knows it. Therefore, these firms will promise you high returns as bait for the investment to be as attractive as possible. This can easily convince even those with small amounts of money because they will only focus on expected returns.

Management Claims

Company managements that aim at duping investors usually make false claims. You need to ensure that the management is consistent and honest in all their stories. Try to engage them in various conversations in different periods and compare the answers. In case you notice any inconsistencies, consider them to be red flags.

Operational Metrics

Investors should know about any necessary operational metric changes in the organization. Key figures such as distribution centers or store count can be vital in understanding the company’s economic status. Whenever the management team refuses to avail of such important information, it may be hiding something from investors.

Audit Report

Every company has to undergo auditing of its financial reports from a reputable and certified audit firm. It acts as a stamp of approval to investors when scrutinizing these statements. 

Look out for businesses that opt to use unknown auditors instead of established ones. Additionally, many auditor changes are a potential deterrent as it may be a sign of disagreements with the management. However, in rare cases, you can also find established accounting firms in such activities. 

Some of the top audit firms include:

  • Deloitte
  • KPMG
  • Ernst & Young
  • PWC
  • Crowe Horwath
  • DBO among others

Business Plan

Typically, any enterprise that wants the public to invest in their business has long-term growth plans. Before investing, ensure that you ask the potential company about their business plan. Businesses that are out there to dupe you are unlikely to have such plans. Some have at least two units on small scale operations meant to cover up for the existing company.

Additionally, you need to make sure that you understand all the activities of the potential company. Don’t let managers convince you that the firm’s production is more cost-effective than others in the same industry.


Many companies are looking to dupe investors, and even the best professors can fall for their deceptive tricks. Watch out for some of the above warning signals before committing your hard-earned money to any investment. In the case of investor fraud, dealing with these cases may prove to be quite a complex process. 

You can hire an experienced attorney with the expertise to successfully navigate through the entire process. They can scrutinize all the documentations from financial statements to audit reports and develop a good case.


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