Accounting Red Flag 5: How much does Terry Smith take home?
Related party transactions are often used to process fraudulent transactions and this is one of the first steps in our First 5 Checklist.
In this video, we look at two examples, one which indicated a risk of potentially fraudulent activity, and the other which disguised the apparent profitability of the business.
We look at the Fundsmith accounts and show how the reported profit is depressed by an allocation to a related company, likely controlled by the founder - this is a good example of why it's important to check the related parties note. If an analyst missed that note (right at the back of the accounts), they might get a false impression of the profitability of the business.
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