Some, but not all, conflicts of interest form the basis for fraud. Fraudsters typically have a sense of entitlement. If they happen to be senior management, they will put their interests ahead of those of the company and its shareholders. Their interests may not always result in something illegal, but they will always be at the expense of others.
Before investing in a company, read the company's annual report. Some conflict of interest red flags are:1) Management compensation
Does management receive compensation based on achieving certain targets? While it is normal to reward executives for targets, is the reward a huge part of their compensation? Some unsavory types may do whatever it takes to achieve these targets, even if it involves misrepresentation or outright fraud.
2) Related party transactions
Does company management has relationships with suppliers, customers or others? Or do company executives have loans from the company? These should be disclosed in the audited financial statements. While these in and of themselves do not constitute fraud, they should cause you concern about management putting the needs of shareholders ahead of their own interests.
Executive compensation should be open and transparent. Anything less should be considered deceptive, if not outright fraud. Sometimes misrepresentation and lack of disclosure is the first step before outright fraud.
If any of the red flags above are present, I won't invest in the company. It's that simple.
