Old scandals, new entities

The adage ‘Old wine in new bottles’, often, has a ring of permanence. Accounting scandals aren’t new as anyone even reasonably familiar with financial shenanigans would know. There is a famous book ‘Financial Shenanigans – how to detect gimmicks and frauds in financial reports’ by Howard M. Schilit, Jeremy Perler, Yoni Engelhart, often used as a standard textbook for undergraduate students of Accountancy.

 “Financial shenanigans refer to the deliberate manipulation of financial data or the use of unethical practices by individuals or companies to deceive investors, regulators, or other stakeholders. These deceptive practices are typically aimed at creating a false impression of a company’s financial health or performance, thereby misleading those who rely on accurate financial information to make informed decisions. Financial shenanigans can take many forms, including fraudulent accounting practices, insider trading, market manipulation, and the creation of complex financial structures designed to hide liabilities or obscure the true nature of a company’s operations”. (https://www.5paisa.com/stock-market-guide/generic/financial-shenanigans)

Tempting, tempting

Oscar Wilde once said: ‘What is temptation, if you can’t yield to it’!

There are many ways to camouflage and some inventive entities help us discover newer ways to mask. You will find sales rising a few years before a planned IPO, or before a valuation and fund-raising round. Anyone trained in Accounting and Financial Reporting ought to be able to unearth, with normal due diligence, although, combines with legal structures, it can get complex.

Now to the story at hand. The business media has just reported that “The artificial intelligence startup, Builder.ai, which recently revealed bankruptcy plans, reportedly fabricated business transactions with Indian social media startup, VerSe Innovation, to falsely enhance its sales. This information was obtained from documents assessed by Bloomberg and individuals who have direct knowledge of the operation”. Incidentally, builder.ai was valued at $1.5 billion some time ago.

The temptation has intensified several fold with the world awash with funds seeking avenues of investment. And, since the early days of the internet, valuations have gone through the roof, with the roof falling every time but with almost no impact of valuations of other entities.

Round-tripping

The trick employed here is termed ‘round-tripping’, the practice of billing each other, with no product or service actually provided. And this is what builder.ai and VerSe are alleged to have practised between 2021-2024. Of course, VerSe denies the claims (https://yourstory.com/2025/05/builderai-dailyhunt-parent-verse-alleged-60m-round-tripping). As another finance and investment related site explains, “In finance, the term round tripping denotes the practice of performing transactions between two or more companies for the sole purpose of boosting income flows. As it implies, round tripping involves transferring assets out of a company, while simultaneously having those assets returned to the same company”.

In foreign direct investment, the term round tripping has a very different (but related) meaning as explained in https://www.scconline.com/blog/post/2025/02/14/round-tripping/. It is a technique used to launder money, channelling the flow of funds through multiple circuitous routes to hide the real owner and the source of funds.

While the basic meaning of round tripping doesn’t changes, it acquires a different dimension depending on the context. As Investopedia explains, “Round-trip trading, or “round-tripping,” usually refers to the unethical practice of purchasing and selling shares of the same security over and over again in an attempt to manipulate observers into believing that the security is in higher demand than it actually is. By creating fake trading volume, round-tripping can also interfere with technical analysis based on volume data” (https://www.investopedia.com/terms/r/round-triptrades.asp).

Global Crossing, a telecommunications company was one of the earliest in the internet era to fall flat after enjoying high valuations, becoming, in the process, a case study of accounting fraud. Enron was another example founded on false reporting of financial (energy) derivatives. It is worth recalling Global Crossing because it demonstrates the excesses that are inevitable when money chases investing avenues.

The most basic point is that the technique is used to inflate what is intended to be inflated – revenue, investment, trading, to name the most obvious areas.

Risks in early stage valuations

The problem is that hype has become central to finance, despite the frequent occurrences of frauds affecting millions of people. Frankly, there are enough indicators or red flags, if anyone cared to look – https://financialcrimeacademy.org/red-flags-in-round-tripping/. Unfortunately, when you see stars, you don’t see anything else, until they are shown to be phantoms.

The truth though is that sophistication in valuation models (completely out of sync with reality) has blinded people to what lies underneath. And a number of examples has convincingly proven to us that the core problem is in the early stages of a start-up. In an excellent article titled ‘The seven deadly sins of valuation’, Henri Philippe – Partner – Accuracy, Franck Bancel – Academic Adviser – Accuracy and Bruno Martinaud – Director of the Technology Venture Master Program – Ecole Polytechnique, show how such sins can be and are committed. Let me quote the opening paragraph to encourage you to read the full article.

“Valuing start-ups is one of the most complex exercises a valuer is likely to face. The main reason for this is that start-ups are innovative companies for which limited financial information is available. The economic model of a start-up is usually not yet stable, and the start-up will have to get through a large number of stages before it reaches maturity. In this context, it is very difficult for a valuer to identify listed assets or comparable transactions, much less provide credible forecasts of cash flows”.

Wilful, wilful, wilful

Often, what we see is the application of these financial and accounting techniques without really paying attention to the fact that a start-up is so different from an established company, masking it instead in phraseology whose intent and goal is to attract investors. You can justify anything if you can find the words to build a narrative that comes across as sound and true. 

Everything, including crime, needs a minimum of two factors. If there is a wilful and carefully orchestrated theatre, there is also a wilfully ignorant audience that is taken in by the glitz.

The orchestra does not stop. It keeps attracting new players.