What NVIDIA Fraud Allegations Teach Small Business Buyers About Due Diligence
I recently came across a Substack article by Shanaka Anslem Perera titled "The Algorithm That Detected a $610 Billion Fraud" that made waves across financial media and prompted NVIDIA to issue a rare seven-page rebuttal memo to Wall Street analysts. His article claims that within 18 hours of NVIDIA's November 19th earnings release, trading algorithms detected accounting irregularities that caused the stock to reverse its initial gains and ultimately shed hundreds of billions in market value.
Whether algorithms actually triggered the stock decline or whether Perera's analysis simply highlighted existing concerns—NVIDIA has vigorously denied all fraud allegations and defended its financial practices as transparent and sound—the red flags identified in the article offer critical lessons for anyone considering acquiring a business. The metrics he highlighted are exactly the ones I scrutinize in my buy-side due diligence work to ensure that my clients are not paying for cash flow that doesn’t exist.
The Substack article’s analysis centered on three red flags that should sound familiar to any M&A advisor: unusual accounts receivable patterns, inventory buildup despite claimed strong demand, and circular financing arrangements. While NVIDIA and numerous analysts have disputed these claims—pointing to the company's strong cash generation and noting factual errors in the analysis—the warning signs Perera identified can appear in small business transactions, and they're often easier to hide in privately-held companies without the scrutiny of public markets or algorithmic oversight.
The Red Flags That Matter: DSO and Cash Conversion
At the heart of Perera's allegations were two critical metrics that form the foundation of working capital analysis: Days Sales Outstanding (DSO) and the cash conversion cycle. According to the article, NVIDIA's accounts receivable jumped 89% year-over-year to $33.4 billion, while DSO increased from 46 to 53 days. Meanwhile, inventory reached $19.8 billion with a 32% quarterly increase, despite management claiming "tight supply" and "strong demand."
Perera's argument was simple: these metrics told a different story than management's narrative. Rising DSO means customers are taking longer to pay or that sales are being booked before cash is likely to materialize. Growing inventory during a supposed supply shortage suggests product isn't moving as quickly as claimed. Together, these patterns indicated a deteriorating cash conversion cycle, which he interpreted as evidence of artificial revenue inflation.
These contradictions are exactly what DSO and the cash conversion cycle are designed to expose. When receivables grow faster than revenue, when customer payment cycles extend, and when inventory piles up despite claimed demand, you're looking at potential signs of channel stuffing, fake sales, or phantom customers.
Why These Metrics Matter in Small Business Acquisitions
In my buy-side due diligence work, I routinely calculate and review Days Sales Outstanding and the cash conversion cycle for exactly these reasons. DSO tells you how long it actually takes to collect cash from customers. A rising DSO can indicate:
Deteriorating credit quality of the customer base
Extended payment terms offered to boost reported revenue
Channel stuffing where distributors are pushed to take inventory they can't sell
Fake sales to non-existent or financially troubled customers
The cash conversion cycle is even more revealing. It measures how long cash is tied up in operations—from paying for inventory to collecting from customers. A lengthening cycle suggests the business is consuming more cash to generate the same revenue, often a sign that reported profits aren't translating to actual cash flow.
NVIDIA defended itself by pointing to $23.8 billion in operating cash flow and noting that its free cash flow has run at approximately 98% of net income since 2018. That's a strong cash conversion rate. But in smaller businesses, I regularly see companies claiming strong profits while burning through cash—a telltale sign that the earnings aren't real.
The Circular Financing Red Flag
Perhaps the most concerning allegation in Perera's article involved circular financing arrangements. He claimed NVIDIA invested in companies that then used those funds to purchase NVIDIA products, creating the appearance of organic customer demand while the money was essentially flowing in a circle. NVIDIA has denied these allegations and explained that its investment strategy focuses on building the AI ecosystem.
In small business acquisitions, circular financing schemes can take the following forms:
The Related Party Customer: A software company shows impressive SaaS revenue growth, but deeper investigation reveals the top three "customers" are entities owned by the seller's family members or business partners. The money flows out as investment or loans, then comes back as "revenue."
The Captive Distributor: A manufacturer reports strong sales to a distributor, but that distributor is actually funded by the manufacturer through extended terms, consignment arrangements, or direct investment. The inventory sits unsold in the distributor's warehouse while the manufacturer books revenue.
The Sister Company Shuffle: Two related companies sell to each other, inflating revenue for both. Company A provides services to Company B at inflated prices, while Company B provides products to Company A at marked-up rates. Both show revenue growth, but no real economic value is being created—it's just money moving between related entities.
The Funded Customer: The seller provides financing, equity investment, or "marketing support" to a customer, who then uses those funds to purchase the seller's products. On paper, it looks like a sale. In reality, it's the seller's own money coming back.
What makes these schemes particularly dangerous for buyers is that they often look legitimate on the surface. The invoices are real. The purchase orders exist. The revenue shows up on the income statement. But the cash conversion cycle reveals the truth: money is tied up indefinitely, collections are slow or non-existent, and the "customers" only buy when they receive funding from the seller.
These schemes fall apart when someone examines the cash conversion cycle, performs detailed customer due diligence, and tracks where money actually flows. In my practice, I always ask: Who are the top customers? What's their payment history? Are there any related party relationships? How were these customer relationships originated? These questions often expose circular arrangements that dramatically overstate sustainable revenue.
What Buyers Should Do
When evaluating any acquisition target, don't just look at the income statement. Demand to see:
Detailed aging of accounts receivable - Who owes money and for how long?
Customer concentration analysis - Are top customers related parties?
Monthly cash flow statements - Does cash coming in match reported revenue?
Inventory turnover trends - Is stock moving or accumulating?
Payment term analysis - Have credit policies changed to boost sales?
Calculate DSO for the trailing twelve months and compare it to industry benchmarks. Calculate the cash conversion cycle and look for trends. A business collecting cash in 30 days with low inventory and paying suppliers in 45 days is generating cash from operations. A business with 60-day collections, growing inventory, and 30-day payables is consuming cash—no matter what the profit and loss statement shows.
The Bottom Line
Whether NVIDIA's metrics represent fraud, aggressive growth management, or simple industry dynamics remains to be determined. The company has strongly defended its practices and pointed to substantial cash generation as evidence of revenue quality. Analysts at Raymond James noted that claims of systematic fraud appear inconsistent with NVIDIA's fundamentals.
But for small business buyers, the lesson is clear: the financial statements tell one story, but cash flow and working capital metrics tell another—often more accurate—story. In my due diligence practice, I've saved clients from disastrous acquisitions by identifying exactly these patterns: great reported earnings, terrible cash conversion.
Before you sign that LOI or wire the down payment, make sure someone is actually calculating DSO, analyzing the cash conversion cycle, and asking tough questions about accounts receivable aging. The difference between a quality business and a house of cards often shows up in these metrics first.
Because whether you're buying a $5 trillion tech giant or a $5 million local business, the fundamentals of financial due diligence remain the same: follow the cash, not just the reported earnings.
As an M&A transaction advisor specializing in buy-side due diligence, I help small business buyers identify red flags in financial statements, working capital, and cash flow before they commit to an acquisition. If you're evaluating a business purchase and want an experienced advisor to scrutinize the numbers, let's connect.