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Comment by boppo1 | Hacker News Reader

Tell a naive young guy more. What are the red flags?

I'm studying for my CFE (Certified Fraud Examiner) and can shed some light on this.

As others mentioned, unexplainable business models or money coming out of nowhere are major red flags. A few others to look out for if you are applying for a job:

1. Few or no internal controls. A medium-size or larger company not having a CFO is particularly questionable.

2. People in high positions, including the CEO, lack qualifications or experience. Often the CEO will hire inexperienced or incompetent people for high-level positions because they a) won't figure out what is going on or b) can figure it out, but are too grateful for the position to say anything. Or maybe the CEO never finished college in a field where everyone has a PhD (think Elizabeth Holmes).

3. History of experienced / qualified people joining the company and leaving soon after

4. Seemingly unexplained success.

5. Extravagant spending and inappropriate workplace behavior.

6. Cult of loyalty to the CEO and/or a "circle" around this person, including close interpersonal relationships.

Well now, you just described a lot of SF startup.

This is a symptom of hype-based valuations.

The pipeline into our collective understanding of tech is now:

scifi hype pitch -> VC flood of investment -> press releases across world -> governments worry -> disappointing IPO -> malpractice -> one or more execs arrested/sacked -> media elite across world convinced new invention will destroy the world

uber creates a taxi service, amazon an online mall, openai a ghost writer -- and we're all subject to an industry of VC hype men desperately trying to get those multiples above 20x by assaulting the popular consciousness with delusional BS

Most of them only have 'wild and inexplicable success' on some internal metric, they generally don't claim to have magically found a way to make billions of dollars on 'arbing btc in Tokyo'.

Apple isn't really a startup now.

I thought about this as I wrote my comment! Of course a red flag is not always a reliable indicator of fraud.

Give it time.

You can watch a good example of this in the Netflix mini-series on Madoff.

Really shows how he did it using the steps detailed above.

https://www.netflix.com/title/81466159?preventIntent=true

The Wolf of wall street film also shows the same pattern.

Another good one is downplaying standard accounting practices in favor of "adjusted" metrics like WeWork's "Community Adjusted EBITDA".

To be fair, there are business models where GAAP doesn't give the full picture. I am currently running an online poker business and GAAP is quite inadequate there

Outstanding advise.

I just had a meeting for a Job. Flags 2 and 4 were there already. Unclear business model. I have a PhD. While this does not make me necessarily smart, I have an insight and understanding of many industries. If I don't understand you business in a few sentences, you are either a fraud or are much much smarter than me.

I give you a few more red flags, but remember, this are red flags, not proof of fraud.

1. Operating over many jurisdictions.

2. Opaque payments/salaries. Either to good to be true or commission based.

3. People who don't understand numbers and often are off by a magnitude. The stock is worth 5 bucks, could go up 200 times and then ist 10k per stock. Company is worth now X billion, could be 200 times more. 200 times? We are taking market capitalization of the biggest players here, is this even possible for this specific industry?

4. Mentioning big names. Studied at MIT etc. (but very likely did not) Or for low lever frauds, build trust by assigning with law enforcement. (My farther works for the police, is a judge etc.)

5. If you know an industry you know the stuff, you know the numbers and you are never caught off guard by a question.

I think a big one is if nobody can explain you where the money is supposed to come from. If it is all hand-wavy and nobody can explain what that company is doing get out. In the best case it was legal, but they are incompetent morons.

Worldcom acquired the company I worked for. I saw their culture featured all manner of players, hustlers, empire builders, untouchable princes, etc. battling for turf. Lords and serfs. The stock was supposed to always go up. "Genius" businessmen somehow figured out how to print money where others had not. The company had a mutual fund that only held Worldcom stock in the 401(k) retirement plan. That was a huge red flag for me and it resulted in many of my colleagues losing their retirement savings. I was far from the levers of power but I had a really bad feeling about the leadership and left before the crash. Since then I have always instantly liquidated all options and stock grants and put them in safer investments. That can be a hard decision to make when you see many people getting rich (perhaps temporarily, perhaps not) betting on the equity to keep improving. But I kept expenses low, saved a lot, and still retired at 49 so I'm happy with how it turned out even if I passed on some big gains.

Spending money like water to make a big splash with advertising, sponsorships and such.

But really, anything to do with crypto or NFTs should be a red flag at this point.

I think the hard part of this for naive young people is that you have to actually do some investigation. This should be front-and-center during your interview process. When they get around to asking if you have any questions for them, you should take that opportunity to see if this is a serious place.

1. When you cannot explain how, mechanically the business works 2. Management is elusive, opaque 3. Employees are lax about controls, compliance, even morality

If your gut says they might be criminals, they are probably criminals.

Far reaching stories of how money is made and the numbers don't actually make any sense. Or it is all financialization. Also unrealistic profits. Without known number of paying customers and known spending.

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