Declining Bad Debt or Loan Loss Coverage Despite Delinquencies
The ratio of allowances to total receivables or non-performing assets steadily declines even as macroeconomic or credit distress increases.
RED FLAG PROFILE & FORMULA
- Indicator: Declining Bad Debt or Loan Loss Coverage Despite Delinquencies
- Screening Formula:
Allowance for Doubtful Accounts / Gross Receivables trending downward while aging brackets > 90 days expand - Targeted Schemes: allowance manipulation, loan loss provisioning.
- False Positive Context: Shift in customer mix from small retail accounts to credit-rated Fortune 500 corporations, or adoption of mandatory credit insurance.
MATHEMATICAL FORMULA & EXTRACTION METHOD
10-K COMPUTATION
Mathematical Formula
Allowance for Doubtful Accounts / Gross Receivables trending downward while aging brackets > 90 days expand
How to Compute from Form 10-K
Examine Schedule II (Valuation and Qualifying Accounts) in Form 10-K. Calculate the allowance as a percentage of gross receivables and compare against write-offs.
False-Positive Boundaries & Legitimate Explanations
Shift in customer mix from small retail accounts to credit-rated Fortune 500 corporations, or adoption of mandatory credit insurance.
FRAUD SCHEMES DETECTED BY THIS INDICATOR
SCHEME CORRELATIONS ALLOWANCE MANIPULATION Click to view journal entries and debits/credits for this scheme. LOAN LOSS PROVISIONING Click to view journal entries and debits/credits for this scheme.
CASES WHERE THIS RED FLAG APPEARED BEFORE DISCOVERY
1 HISTORICAL CASES| Case Title | Jurisdiction | Primary Scheme | Action Date |
|---|---|---|---|
| Colonial Bank: $2.9B Fake Mortgage Collateral Fraud with Taylor Bean | US | loan loss provisioning | 2013-09-20 |