Conducting Forensic Accounting Investigations

1
Conducting Forensic Accounting Investigations

• Panelists
• Marc Sherman
• Khalid Mohiuddin

Moderator Darryl Neier
2
Agenda

• Investigative Process
• Case Study
• Investigative Conclusion
• Scheme(s) du jour
• The Future of Whistle Blowing

3
Reasons to Investigate

• External/Internal Audit finding(s)
• Employee allegation(s) of fraudulent conduct
• Management review(s)
• Vendor/Customer complaint(s)
• Government subpoena
• Other anomalies data analyses

4
Inherent Risk

• Expensive and uncertain results
• Legal liability failure to protect privilege
• Uncover significant information
• Stimulate disgruntled employees angst
• Adverse publicity
• Preoccupied resources
• Business disruptions

5
Establish Predication Initiate Investigation

• Predication
• Assemble the team
• Competency of team members
• Non-destructive communication
• Attorney-Client privilege
• Whistleblower protection
• Confidentiality of allegation

6
The Fraud Team A Daily Chore

• Fraud Examiners
• Auditors
• Security
• Human Resources Personnel
• Management Representative
• Outside Consultant
• Legal Counsel
• Information Systems Personnel

7
Early Stages

• Background and understanding
• Gathering information
• Coordinating team responsibilities
• Identify a project manager team leader
• Communication protocol
• Activate fraud response plan
• Attorney client privilege ??

8
Proving Intent

1. Present evidence in chronological order. (Timing
   of key transactions)
2. Find altered, concealed, or destroyed documents
   or evidence (e.g., deliberate backdating.)
3. Look for pattern or repetition of suspicious
   behavior.
4. Obtain a confession
5. Obtain testimony of co-conspirator.

9
Zeo Case Study

• The case of the Houdini inventory

10
Zeo Case Study

• Zeus Inc. is a large computer components
  manufacture and supplier
• Zeus Inc. contemplates the purchase of a
  competitor (Zeo Ltd.) whose target market is
  medium to lower grade products in developing
  European countries
• Due to the ability in offering lower price
  points, Zeo Ltd. is seen as the greatest threat
  in the developing markets

11
Zeo Case Study

• Zeus Inc. acquires Zeo Ltd. which was privately
  owned by 6 individuals
• Zeo Ltd. has primary operations in Czech Republic
  (Zeo CZ) and 5 other developing European nations
  
• Zeus Inc. decides to continue to run the
  operation with the Zeo trademark

12
Zeo Case Study

• Three of six former owners remain with Zeo Ltd.
  after acquisition
• Several family members of former owners also
  continue to remain employed with Zeo Ltd.

13
Zeo Case Study

• After the acquisition Zeus Inc. decides to
  perform an internal audit of receivables due to
  unusual transactions
• EUR 40 write-off of receivables and EUR 10
  write-off of inventory resulting from an import
  methodology between the parent operations at Zeo
  CZ and a subsidiary of Zeo in Russia (Zeo RU).

14
Predication

• After acquisitionZeus Inc. discovers unusual
  transactions related to inter-company sales at
  Zeo Ltd.

EUR 40 write-off of receivables resulting from
an import methodology at the parent company and
a EUR 10 write-off of inventory at a subsidiary
Investigation started by Zeus Inc.
15
Analysis Chart
Develop Fraud Theory Where is the evidence
likely to be?
16
Suspicious transactions

• The Internal Audit team conducts an audit at Zeo
  CZ and Zeo RU

• Reviewed transactions in sales ledger of Zeo CR
  from January 1, 2007 to September 30, 2008
• Found that Zeo CZ made inter-company sales to Zeo
  RU totalling EUR 104.
• Internal Audit tested 23 items (EUR 50) from the
  sales ledger

17
Suspicious transactions

• Of the 23 transactions tested, matching payment
  amounts for 17 transactions (EUR 40) were
  received from factoring companies by Zeo CZ.
• Payments in respect of the remaining 6 sampled
  transactions (EUR 10) were still outstanding at
  the time of the audit and reflected as open
  accounts receivable

18
Zeo Case Study

• Analyzing available data
• Sales ledger / AR details at Zeo CZ / AP details
  at Zeo RU
• Allowances / reserves / provisions / historic
  write-downs
• Shipping documentation
• Creating a Hypothesis
• Was there a scheme to?
• Testing the Hypothesis what if scenario
• ? Review AR details at Zeo CZ / AP details at Zeo
  RU
• ? Conduct transaction tracing (order to cash)
• ? Review logistical documentation (shipping
  transport documentation)

19
Investigative Field WorkandFindings
20
Field Work Findings
?
Union Holding
Factoring Companies
5. Order in Rubel
6. Delivery
7. Invoice in Rubel
Zeo RU
8. Payment in Rubel
4.
9. Payment in
3. Delivery via forwarderUnion Holding
1. Order in
2. Invoice in
Russia
Zeo CZ
Czech Republic
1. Zeo RU had no foreign trade permission and no
foreign currency account 2. Zeo RU didnt book
the invoice from Zeo CZ 5. Zeo RU orders based
on the amount of the Zeo CZ invoice 2.
changed to Rubel 3 VAT, (Duties covered?) 9.
Zeo CZ receives payment in after the payment
from Zeo RU to Union Holding
Import duties (15)?
21
Field Work Findings
1

• Zeo RU places order for finished goods with Zeo CZ

2

• Zeo CZ fills order and raises invoice against the
  customer Zeo RU in the Zeo CZ accounting system

3
22
Field Work Findings

• Zeo CR ships products
• Shipping documentation showed goods picked up by
  a transport named LeMans and taken to a
  warehouse out side of Prague
• From warehouse goods picked up by a transport
  company named Rye
• Goods dropped at an undisclosed location for
  forwarding to Zeo RU

3
4
23
Field Work Findings
?
Union Holding
Factoring Companies
5. Order in Rubel
6. Delivery
7. Invoice in Rubel
Zeo RU
8. Payment in Rubel
4.
3. Delivery via forwarderUnion Holding
9. Payment in
1. Order in
2. Invoice in
Russia
Zeo CZ
Czech Republic
1. Zeo RU had no foreign trade permission and no
foreign currency account 2. Zeo RU didnt book
the invoice from Zeo CZ 5. Zeo RU orders based
on the amount of the Zeo CZ invoice 2.
changed to Rubel 3 VAT, (Duties covered?) 9.
Zeo CZ receives payment in after the payment
from Zeo RU to Union Holding
Import duties (15)?
24
Field Work Findings

• Goods disappear and presumable arrive in Russia
  at an intermediary (Union Holdings)
• Clue of possible route into Russia from customs
  stamps on domestic paperwork
• No evidence of customs duties being paid

4
5
25
Field Work Findings
?
Union Holding
Factoring Companies
5. Order in Rubel
6. Delivery
7. Invoice in Rubel
Zeo RU
8. Payment in Rubel
4.
3. Delivery via forwarderUnion Holding
9. Payment in
1. Order in
2. Invoice in
Russia
Zeo CZ
Czech Republic
1. Zeo RU had no foreign trade permission and no
foreign currency account 2. Zeo RU didnt book
the invoice from Zeo CZ 5. Zeo RU orders based
on the amount of the Zeo CZ invoice 2.
changed to Rubel 3 VAT, (Duties covered?) 9.
Zeo CZ receives payment in after the payment
from Zeo RU to Union Holding
Import duties (15)?
26
Field Work Findings
5

• Zeo RU places order in rubles of identical order
  to Zeo CR on Union Holdings

6

• Delivery of goods to Zeo RU by Union Holdings

7

• Invoice by Union Holdings to Zeo RU (in rubles)

8

• Payment by Zeo RU to Union Holdings (in rubles)

27
Field Work Findings
?
Union Holding
Factoring Companies
5. Order in Rubel
6. Delivery
7. Invoice in Rubel
Zeo RU
8. Payment in Rubel
4.
3. Delivery via forwarderUnion Holding
9. Payment in
1. Order in
2. Invoice in
Russia
Zeo CZ
Czech Republic
1. Zeo RU had no foreign trade permission and no
foreign currency account 2. Zeo RU didnt book
the invoice from Zeo CZ 5. Zeo RU orders based
on the amount of the Zeo CZ invoice 2.
changed to Rubel 3 VAT, (Duties covered?) 9.
Zeo CZ receives payment in after the payment
from Zeo RU to Union Holding
Import duties (15)?
28
Field Work Findings

• Off-shore agents wire money (in Euros) either to
  Czech factoring companies to the credit of Zeo CZ
  accounts or directly to the accounts of Zeo CZ
• Zeo CZ accounting staff received a phone call by
  an individual who provided details of which
  transactions money was wired for

9
29
Investigative Conclusion

• It was also determined that Union Holding and/or
  off-shore agents (believed to be one in the same)
  took a 5 commission on transaction
• 18 VAT was raised on invoices by Union Holding
• Benefit could have been as high as 20 of each
  transaction

30
Investigative Conclusion

• Confirmed
• Financial misstatements
• Kickbacks
• Unconfirmed
• Bribery

31
Investigative Conclusion

• Former owners knew of and approved the scheme
• one day companies
• Eurotrans appeared to be the link between
  movement of inventory and the payments
• EUR 10 was missing

32
Scheme(s) du jour
Khalid Mohiuddin
33
The Future of Whistle Blowing
Marc Sherman
34

• Thank-you
• Question?