Phase 1 — Classic Fraud Schemes · 8 min read
1 · Owner Withdrawals Disguised as Loans
Cash taken out of the company and recorded as a loan receivable instead of a distribution or salary.
01How a draw becomes a loan
An owner takes cash out. Recorded as a distribution, it is taxable income and visible to the other partners. Recorded as a shareholder or partner loan receivable, it becomes an asset of the company and a debt of the owner — invisible on the income statement, buried on the balance sheet, and frequently never repaid. The balance grows every year and nobody asks.
- “Due from shareholder” or “due from partner” balances that only increase year over year.
- No promissory note, no stated interest rate, and no repayment schedule.
- Year-end journal entries reclassifying personal expenses to loans or to consulting fees.
- An officer salary suppressed below market while the owner's lifestyle continues unchanged.
02The audit test
Ask for the note, the interest calculation, and the repayment history. A genuine loan has all three. A disguised draw has none, and the absence is the finding.
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2 · Gift Cards and Concealed Personal Spending
Gift cards bought as business expense and converted into anonymous personal spending power.
3 · Undisclosed Debt and Pledged Assets
Loans taken against company assets without partner knowledge or consent.
4 · Inventory Theft and Cash Skimming
The two oldest schemes — taking product before it is recorded, and taking cash before it is deposited.
5 · Customer Payments Diverted from the Business
Customer remittances redirected to an account the company does not own.