Do your company’s 2026 strategic plans include a business acquisition? Whether you already have your eye on a target or are still weighing options, plan now for extensive financial due diligence. To help ensure a successful transaction, it’s critical to review a seller’s statements and other records for signs of owner or employee fraud.

Subtle warning signs
Forensic accountants can add significant value during mergers and acquisitions (M&A) due diligence. Fraud experts generally scour financial statements for subtle warning signs, including:

- Excess inventory,
- Significant write-offs of inventory, accounts receivable or other assets,
- An unusually high number of voided transactions or excessive returns,
- Insufficient documentation of sales,
- Increased purchases from new vendors, and
- Progressively higher accounts payable and receivable combined with dropping or stagnant revenues and income.

Suspicious revenue, cash flow and expense patterns, as well as unreasonable-seeming growth projections, warrant further investigation.

Note: Although findings such as these can prove to be the tip of the fraud iceberg, they might also indicate unintentional errors. Some small businesses may lack the internal financial expertise to prepare reliable statements and may not engage external auditors to review them. But whether financial irregularities are accidental or intentional, you’ll want to know exactly what you’re getting into.

Insider activity
To determine whether unusual income figures indicate systematic manipulation, forensic experts usually consider whether insiders had the opportunity to commit fraud — for example, if the business has failed to implement and enforce solid internal controls. Regulatory disapproval, customer complaints and suspicious supplier relationships can also raise red flags. If warranted, an expert may perform background checks on a target company’s principals.

It’s important to know that some sellers adopt legitimate accounting practices to present a selling business in the best possible light. However, if your forensic accountant finds misrepresentations — especially by executives — you’ll probably want to rethink your acquisition offer. In less serious cases, you may need to make purchase price adjustments or change the deal’s structure. In severe cases, you may need to walk away.

One way to protect your transaction, even if a seller successfully hides financial manipulation and other illegal activities, is to include an indemnification clause in your purchase agreement. Your M&A advisors may have to negotiate with the seller over liability limits and other details, such as the definition of “fraud.” But such clauses can help you manage acquisition risk.

Professional expertise
M&As are transactions you never want to attempt without the guidance and expertise of professional advisors. Effective deal teams typically include investment bankers or brokers, attorneys and accountants with various specialties. To avoid M&A fraud, make sure you include a forensic accountant on your team.