First Brands

Joined by More Cockroaches

The recent collapses of First Brands, Tricolor, and other financially distressed companies remind appraisers that inaccuracies in financial reporting can impact the credibility of the calculation or conclusion of value. When industries undergo rapid change, the appraiser’s role could be not only to interpret market data, but also to verify the truth of the financial foundation upon which that data rests. This author shares when and why a forensic accounting engagement is advisable before preparing a business valuation.

Introduction

Recent news about cockroaches includes pest-related issues like an infestation at a Florida cafe and a San Jose restaurant that was condemned. Separately, the term “cockroach” is being increasingly used metaphorically in finance to describe hidden financial risks, following comments by a JPMorgan Chase CEO, notes Bloomberg.com.[1]

In the same article, Bloomberg reported:[2]

• Two regional U.S. banks disclosed credit losses due to fraud, sparking concerns about a potential domino effect of losses in the financial system.
• Josh Wander, co-founder of 777 Partners, was charged with a $500 million fraud against lenders and investors, which he denies, and JPMorgan Chase & Co. confirmed it took a $170 million hit related to the Tricolor bust.
• Investors are spooked by the similarities between recent cases of fraud and poor lending standards, with Jamie Dimon warning that “when you see one cockroach, there are probably many more” and expressing concerns about the troubles he is watching in the financial system.
• The cockroach sightings are multiplying. Two regional U.S. banks disclosed credit losses due to fraud in October, in a week when investors were already on edge from the twin failures of Tricolor Holdings and First Brands Group, as well as some choice comments from industry leaders about poor lending standards.
• The seemingly idiosyncratic blowups could be viewed as one-off stories of poor management or bad behavior with little in common. But as accusations of fraud mount among companies that have been exploiting an over-eager supply of debt, the similarities may grow.

Impact on Auto Industry

Such blowups, especially in the car-loan, car-parts, and other sectors of the automobile industry have continued to make news. The Economist reported:[3]

PrimaLend Capital Partners, an American lender, filed for bankruptcy after missing interest payments on its debt. The company, which provides sub-prime borrowers with car loans, said it would continue operating while it tries to sell its business in bankruptcy court. Car-loan defaults and repossessions are on the rise among low-income Americans. Last month, two other car companies, First Brands and Tricolor, went bust.

How Appraisers Can Respond

So, how are appraisers supposed to respond to rapidly changing trends in a particular industry? Appraisers are expected to respond to rapidly changing trends in an industry by adjusting both their data sources and valuation judgment to ensure their calculations or opinions of value reflects market reality as of the valuation date. Appraisers should consider:

• Using the most recent and relevant transaction, trading, and market data. Relying on stale comparables or outdated multiples can misstate value in volatile industries.
• Reducing look-back periods for guideline public company and transaction analyses when rapid change occurs.
• Distinguishing between short-term fluctuations and structural changes; are we seeing a temporary dislocation or permanent shift.
• Reconsidering whether historical performance represents future expectations.
• Adjusting assumptions regarding growth, margins, and risk premiums to reflect the current environment rather than an average of the past.
• Updating cost of capital inputs using contemporaneous data and market evidence rather than standard assumptions.
• Considering whether well-supported forward projections better capture the expected future net cash flows rather than historical multiples.
• Expanding sensitivity analysis and scenario modeling.
• Demonstrating increased recognition of how willing buyers and willing sellers, both fully informed and under no compulsion to act, are transacting at arm’s length in the current market.
• Disclosing how valuation calculation and opinions could change under alternate assumptions.
• Performing (or having some other professional perform) a forensic accounting investigation on the accounting books and records and periodic/annual financial statements before relying on them to complete the business valuation engagement (this step is discussed below in additional detail). Forensic accounting comes first, valuation second.

Performing a Forensic Accounting “Phase One” Investigation

Generally, appraisers rely on client-provided financial information to the extent it appears reasonable and consistent. If there are red flags (unexplained adjustments, inconsistent profitability ratios, missing documentation, unavailable explanations, and/or evidence of suspicious related-party transactions), appraisers generally require or pursue further inquiry before proceeding. The forensic accounting investigation could be targeted to identify whether revenues are misstated, expenses deferred, assets inflated, or liabilities underreported.

Some appraisers may choose to (or be specifically engaged to) personally perform that work; others may prefer to separate the forensic investigation from the business valuation engagement. Some appraisers (and/or some clients) prefer a different professional to conduct the forensic investigation to preserve independence, compliance, credibility, efficiency, and legal defensibility. Either way, the appraiser’s engagement, in these circumstances, begins once the reliability of the accounting books and records and periodic/annual financial statements are established to a reasonable degree of accounting certainty.

When an appraiser suspects that the accounting records may be unreliable, a forensic accounting investigation should precede the valuation. The objective is to determine whether the company’s reported earnings, assets, liabilities, and cash flows are materially correct and fairly stated. This preliminary phase is distinct from valuation; it establishes the factual foundation on which a credible valuation can rest.

Nature, Timing, and Extent of “Phase One” Work

What then is the scope of work and the nature, timing, and extent of the forensic accounting procedures that are performed in “phase one” work when that is done first?

The forensic accounting “phase one” is an evidence-based financial integrity assessment designed to detect, quantify, and correct misstatements or irregularities before the valuation. It includes testing whether the general ledger, subledgers, and trial balance reconcile, verifying that transactions are properly recorded and supported by documentation; for the sole purpose of providing the appraiser with corrected, supportable financial data (ignoring that for the purposes of this article that the resulting accounting adjustments could be posted into the General Ledger for other purposes as well). This article also does not concern itself with whether “phase one” results in an oral or written report outlining the information and/or documentation considered, the procedures performed, and/or any remaining uncertainties (neither is the issue of whether an “agreed-upon procedures” engagement format is or is not used).

The nature, timing, and extent of the forensic accounting work depends on the degree of doubt about reliability. Conceivably there is spectrum ranging from:

• A “Limited-Scope” investigation (to be applied when minor inconsistencies exist but financials are mostly sound, with focus only on reconciliations and limited testing of high-risk accounts).
• A “Moderate-Scope” investigation (to be applied when management integrity is uncertain or prior external audits are regarded as weak, which includes substantive transaction testing, bank confirmations, and internal control structure work).
• A “Full-Scope” investigation (to be applied when fraud or misappropriation is suspected, and includes a financial analysis of all material transactions and balances, management interviews, tracing of funds through related entities, and “substantive testing” of all material balance sheet items; a search for unrecorded revenue and/or unrecorded liabilities may also be part of the scope of work here).

Completion of “Phase One” Work

At completion, the forensic accountant produces:

• A summary of findings describing the nature and amount of identified adjustments.
• A listing of all proposed adjusting journal entries.
• Adjusted and restated periodic/annual financial statements suitable for valuation purposes.
• Unresolved forensic accounting issues that could impact the calculation or opinion of value.

Once the forensic phase is complete, the appraiser uses the forensically adjusted financials as the basis for normalization and projections. Risk adjustments in the discount or capitalization rates may reflect any remaining uncertainty identified during the forensic review. The valuation report should reference the forensic accounting work as the foundation for data reliability and the credibility of the value conclusion.

Conclusion

The recent collapses of First Brands, Tricolor, and other financially distressed companies remind appraisers that inaccuracies in financial reporting can impact the credibility of the calculation or conclusion of value. When industries undergo rapid change, the appraiser’s role could be not only to interpret market data, but also to verify the truth of the financial foundation upon which that data rests.

Before forming any opinion of value, appraisers should consider, as and/or where necessary/applicable, that the subject company’s accounting books and records can reasonably be relied upon. If the integrity of those records is uncertain, a forensic accounting investigation might be a necessary prelude to the business valuation engagement.

Once the forensic “phase one” is completed and the accounting books and records and periodic/annual financial statements have been investigated and, if necessary, adjusted, the appraiser could continue to base normalization, projections, and cost of capital assumptions on those corrected results. Valuations should incorporate contemporaneous market data, recognize ongoing industry risk, and explicitly disclose how alternate assumptions could change the value conclusion.

[1] Jamie Dimon’s Cockroaches Keep Appearing in Risk for Markets – Bloomberg

[2] Jamie Dimon’s Cockroaches Keep Appearing in Risk for Markets – Bloomberg

[3] October 22, 2025.

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Michael D. Pakter, CPA, CFF, CGMA, CFE, CVA, MAFF, CA, CIRA, CDBV, has more than 45 years of experience in forensic accounting, investigations, and litigation services, including more than 25 years of experience in economic damages and business valuations. State, federal, and bankruptcy courts have recognized him as an expert in forensic accounting, economic damages, business valuation, alter ego, marital dissolution, and bankruptcy core proceedings.

Mr. Pakter can be contacted at (773) 671-1950 or by e-mail to mpakter@litcpa.com.