Conflicts of Interest Chapter 12

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Conflicts of InterestChapter 12
Accounting 499/696 April 9, 2003 By Nicolette
Neutz
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Definition of Conflict of Interest

• Occurs when an employee, manager, or executive
  has an undisclosed economic or personal interest
  in a transaction that adversely affects the
  company.
• These schemes only account for 1.7 of all cases
  studied
• With a median loss of 500,000

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Types of Schemes

• Purchases Schemes
• Sales Schemes
• Other Schemes

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Purchases Schemes

• Most common type of purchases schemes is the
  overbilling scheme
• In order to be considered as a conflict of
  interest the employee must have some kind of
  ownership or employment interest in the vendor
  that submits the invoice
• The fraudsters interests lie with a company other
  than his employer

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Purchases Schemes

• Another type of purchases schemes is purchase of
  a unique assets
• Unique assets are typically large assets
• Such as
• Land
• Building

The fraudster has to stand to profit from the
sale
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Purchases Schemes

• Third type of purchases scheme is turnaround
  sales
• In this type of scheme the employee knows his
  employer is looking for an asset so the employee
  buys it and then turns around and resells the
  item to his employer at an inflated price

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Sales Schemes

• Underbilling schemes the perpetrator underbills
  the vendor in which he has a hidden interest
• The victim company ends up selling its goods or
  services below fair market value, which results
  in a diminished profit

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Sales Schemes

• Second type of sales schemes is writing off sales
• This occurs when the perpetrator tampers with the
  books of the victims company to decrease or write
  off the amount owed by an employees business

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Other Schemes

• Delayed billing
• Business Diversions
• By siphoning off clients for own business
• Resource Diversions
• Divert funds to development of their own business
• Financial Disclosures
• Management is not required to disclose fraudulent
  behavior unless it is charge criminal conduct

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Case Study ElectroCity

• Rita Mae King was a purchasing agent at
  ElectroCity
• On the side she ran a travel agency out of her
  office
• King would feed business to Spicewood travel
  agency for kickbacks
• As purchasing agent she would book every trip
  that ElectroCity took through Spicewood

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Case Study ElectroCity (Cont.)

• In return she was able to use Spicewoods perks
  for personal use
• Discount airline tickets, hotel room etc.
• What was Ritas pressure?
• What was her opportunity?
• What was her rationalization?

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Red Flags

• Vendor addresses and employee address match
• Vendor owned by employee
• Related Party Transactions
• Rise in the cost of routine purchases beyond the
  inflation rate.
• Frequent undocumented and/or unapproved
  adjustments, credits, and write- offs to accounts
  receivable subledger.

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Detection

• Tips and complaints
• Review of vendor ownership files
• Comparison of vendor addresses with employee
  addresses
• Review of exit interviews
• Interview with purchasing personnel for favorable
  treatment of one or more vendors

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Prevention

• Conflicts of interest are one of the most
  difficult schemes to detect
• To help prevent
• Require an annual disclosure statement
• Compare the disclosed names and addresses with
  the vendor list
• Communicate with employees regarding their other
  business interests

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Who has the first question?