The Builder.ai Collapse: A $1.5 Billion Lesson in Why Internal Audit Matters More Than Ever

The recent spectacular collapse of Builder.ai, once valued at $1.5 billion and backed by Microsoft, SoftBank, and other major investors, serves as a sobering reminder of what happens when organizations prioritize narrative over substance, and when robust internal controls take a backseat to growth at all costs.

For those of us in the audit profession, the Builder.ai story isn't just another startup failure. It's a masterclass in how the absence of effective internal audit can allow deception to flourish unchecked, ultimately destroying stakeholder value and devastating lives.

The Red Flags Were There All Along

Builder.ai claimed its AI assistant "Natasha" could build software with minimal human input. The reality? Seven hundred engineers in India were manually writing code while the company portrayed their work as AI-generated. This wasn't a minor embellishment, it was the foundation of their entire business model and investor pitch.

What's particularly striking is that these red flags surfaced as early as 2019. A Wall Street Journal investigation found that most coding was done manually, with AI capabilities largely exaggerated. Former employees raised concerns about deceptive practices. Yet the company continued operating for six more years, raising hundreds of millions more in funding.

This is where internal audit could have made the difference.

Where Internal Audit Would Have Intervened

An effective internal audit function would have identified and escalated several critical issues:

Revenue Recognition and Financial Reporting: The discovery that Builder.ai claimed $220 million in 2024 revenue when actual income was closer to $50 million represents a massive financial reporting failure. Internal audit's role in testing revenue recognition processes and ensuring accurate financial reporting could have prevented this four-fold overstatement.

Operational Controls and Process Validation: Claims that apps were "80% built by AI" when the technology was barely functional represent a fundamental disconnect between marketing claims and operational reality. Internal audit's process reviews would have identified this gap between stated capabilities and actual delivery methods.

Third-Party Relationships and Conflicts: Allegations of "round-tripping" with Indian social media firm VerSe to inflate sales numbers point to related-party transaction issues that should have been caught through proper controls testing and third-party relationship reviews.

Technology and Cybersecurity Assessments: For a company built on AI claims, regular technology audits would have quickly revealed the gap between marketing promises and actual capabilities.

The Cost of Audit Absence

Without these checks and balances, Builder.ai was able to:

• Mislead investors about core business operations
• Inflate financial performance by 340%
• Continue fraudulent practices for years despite early warnings
• Accumulate $115 million in unpaid vendor obligations
• Ultimately destroy nearly 1,000 jobs across five countries

The human cost extends far beyond the financial losses. Employees who believed they were building the future of AI development found themselves unemployed when the truth emerged. Investors who trusted in rigorous due diligence discovered their faith was misplaced.

Lessons for Today's Audit Professionals

The Builder.ai collapse offers several critical insights for internal audit professionals:

1. Technology Claims Require Technical Validation In our AI-driven world, auditors must develop the capability to assess technology claims. This means building relationships with technical experts who can validate operational capabilities against marketing claims.

2. Revenue Recognition Deserves Extra Scrutiny When companies experience rapid growth, revenue recognition processes can become strained. Regular testing of revenue streams, especially those involving complex arrangements or new business models, is essential.

3. Cultural Red Flags Are Audit Indicators Former employees described a culture where concerns were dismissed and whistleblowers were terminated. These cultural indicators should trigger expanded audit procedures and deeper investigations.

4. Third-Party Relationships Need Ongoing Monitoring The alleged round-tripping scheme with VerSe demonstrates why third-party relationships require continuous monitoring, not just initial approval processes.

The Path Forward

As audit professionals, we must position ourselves as guardians against the kind of systematic deception that destroyed Builder.ai. This means:

• Developing technical competencies to assess AI and technology claims
• Strengthening revenue assurance programs for high-growth companies
• Building robust whistleblower programs that protect and encourage reporting
• Implementing continuous monitoring of key business processes and relationships

The Builder.ai story is ultimately about accountability, or the lack thereof. When internal controls fail, when oversight is absent, and when growth narratives overshadow operational reality, stakeholders pay the price.

As internal auditors, we have both the opportunity and the responsibility to prevent the next Builder.ai. The question isn't whether we can afford to invest in robust internal audit capabilities, it's whether we can afford not to.

In our work at Cherry Hill Advisory, we've observed that organizations with the strongest defenses against these systematic failures share common characteristics: they maintain rigorous separation between operational capabilities and marketing claims, they regularly validate their core business processes through independent assessment, and they foster cultures where difficult questions are welcomed rather than discouraged.

The audit profession exists to provide assurance in an uncertain world. The Builder.ai collapse reminds us why that mission has never been more critical.

Stay connected: follow us on LinkedIn and explore more at www.CherryHillAdvisory.com.