conducting forensic accounting investigations

Conducting Conducting Forensic Accounting Forensic Accounting

InvestigationsInvestigations

Panelists:Panelists:Marc ShermanMarc Sherman

Khalid MohiuddinKhalid Mohiuddin

Moderator:Moderator:Darryl NeierDarryl Neier

21st Annual ECI Conference

AgendaAgenda

Investigative ProcessInvestigative Process Case StudyCase Study Investigative ConclusionInvestigative Conclusion Scheme(s) du jourScheme(s) du jour The Future of Whistle BlowingThe Future of Whistle Blowing


Reasons to InvestigateReasons to Investigate

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


Inherent RiskInherent Risk

Expensive and uncertain resultsExpensive and uncertain results Legal liability – failure to protect privilegeLegal liability – failure to protect privilege Uncover significant informationUncover significant information Stimulate disgruntled employees & angstStimulate disgruntled employees & angst Adverse publicityAdverse publicity Preoccupied resourcesPreoccupied resources Business disruptionsBusiness disruptions


Establish Predication – Establish Predication – Initiate InvestigationInitiate Investigation

PredicationPredication Assemble the teamAssemble the team Competency of team membersCompetency of team members Non-destructive communicationNon-destructive communication Attorney-Client privilegeAttorney-Client privilege Whistleblower protectionWhistleblower protection Confidentiality of allegationConfidentiality of allegation


The Fraud Team – A Daily Chore The Fraud Team – A Daily Chore

Fraud ExaminersFraud Examiners AuditorsAuditors SecuritySecurity Human Resources PersonnelHuman Resources Personnel Management RepresentativeManagement Representative Outside ConsultantOutside Consultant Legal CounselLegal Counsel Information Systems PersonnelInformation Systems Personnel


Early StagesEarly Stages

Background and understandingBackground and understanding Gathering informationGathering information Coordinating team responsibilitiesCoordinating team responsibilities Identify a project manager – team leaderIdentify a project manager – team leader Communication protocolCommunication protocol Activate fraud response planActivate fraud response plan Attorney client privilege ??Attorney client privilege ??


ProvingProving IntentIntent

1.1. Present evidence in chronological order. Present evidence in chronological order. (Timing of key transactions)(Timing of key transactions)

2.2. Find altered, concealed, or destroyed Find altered, concealed, or destroyed documents or evidence (e.g., deliberate documents or evidence (e.g., deliberate backdating.)backdating.)

3.3. Look for pattern or repetition of suspicious Look for pattern or repetition of suspicious behavior.behavior.

4.4. Obtain a confessionObtain a confession

5.5. Obtain testimony of co-conspirator.Obtain testimony of co-conspirator.


ZeoZeo CaseCase StudyStudy

The case of the “Houdini” inventoryThe case of the “Houdini” inventory


Zeo Case StudyZeo Case Study Zeus Inc. is a large computer components Zeus Inc. is a large computer components

manufacture and supplier manufacture and supplier

Zeus Inc. contemplates the purchase of a Zeus Inc. contemplates the purchase of a competitor (Zeo Ltd.) whose target market is competitor (Zeo Ltd.) whose target market is medium to lower grade products in medium to lower grade products in developing European countriesdeveloping European countries

Due to the ability in offering lower price Due to the ability in offering lower price points, Zeo Ltd. is seen as the greatest threat points, Zeo Ltd. is seen as the greatest threat in the developing marketsin the developing markets


Zeo Case StudyZeo Case Study Zeus Inc. acquires Zeo Ltd. which was Zeus Inc. acquires Zeo Ltd. which was

privately owned by 6 individualsprivately owned by 6 individuals

Zeo Ltd. has primary operations in Czech Zeo Ltd. has primary operations in Czech Republic (Zeo CZ) and 5 other developing Republic (Zeo CZ) and 5 other developing European nations European nations

Zeus Inc. decides to continue to run the Zeus Inc. decides to continue to run the operation with the “Zeo” trademark operation with the “Zeo” trademark


Zeo Case StudyZeo Case Study Three of six former owners remain with Zeo Three of six former owners remain with Zeo

Ltd. after acquisitionLtd. after acquisition

Several family members of former owners Several family members of former owners also continue to remain employed with Zeo also continue to remain employed with Zeo Ltd.Ltd.


Zeo Case StudyZeo Case Study

After the acquisition Zeus Inc. decides to After the acquisition Zeus Inc. decides to perform an internal audit of receivables due perform an internal audit of receivables due to unusual transactionsto unusual transactions

EUR 4’0 write-off of receivables and EUR 1’0 EUR 4’0 write-off of receivables and EUR 1’0 write-off of inventory resulting from an “import write-off of inventory resulting from an “import methodology” between the parent operations methodology” between the parent operations at Zeo CZ and a subsidiary of Zeo in Russia at Zeo CZ and a subsidiary of Zeo in Russia (Zeo RU).(Zeo RU).


PredicationPredication

After acquisition…Zeus Inc. discovers After acquisition…Zeus Inc. discovers unusual transactions related to inter-unusual transactions related to inter-company sales at Zeo Ltd.company sales at Zeo Ltd.EUR 4’0 write-off of receivables resulting from EUR 4’0 write-off of receivables resulting from

an “import methodology” at the parent company an “import methodology” at the parent company and a EUR 1’0 write-off of inventory at a and a EUR 1’0 write-off of inventory at a subsidiarysubsidiary

Investigation started by Zeus Inc.


Analysis ChartAnalysis Chart

Develop Fraud Theory

Where is the evidence likely to be?


Suspicious transactionsSuspicious transactions

The Internal Audit team conducts an audit at Zeo The Internal Audit team conducts an audit at Zeo CZ and Zeo RUCZ and Zeo RU Reviewed transactions in sales ledger of Zeo CR from Reviewed transactions in sales ledger of Zeo CR from

January 1, 2007 to September 30, 2008January 1, 2007 to September 30, 2008

Found that Zeo CZ made inter-company sales to Zeo RU Found that Zeo CZ made inter-company sales to Zeo RU totalling EUR 10’4. totalling EUR 10’4.

Internal Audit tested 23 items (EUR 5’0) from the sales Internal Audit tested 23 items (EUR 5’0) from the sales ledgerledger


Suspicious transactionsSuspicious transactions Of the 23 transactions tested, matching payment amounts Of the 23 transactions tested, matching payment amounts

for 17 transactions (EUR 4’0) were received from for 17 transactions (EUR 4’0) were received from ““factoring companiesfactoring companies” by Zeo CZ. ” by Zeo CZ.

Payments in respect of the remaining 6 sampled Payments in respect of the remaining 6 sampled transactions (EUR 1’0) were still outstanding at the time of transactions (EUR 1’0) were still outstanding at the time of the audit and reflected as open accounts receivablethe audit and reflected as open accounts receivable


Zeo Case StudyZeo Case Study Analyzing available data:Analyzing available data:

Sales ledger / AR details at Zeo CZ / AP details at Zeo RUSales ledger / AR details at Zeo CZ / AP details at Zeo RU

Allowances / reserves / provisions / historic write-downsAllowances / reserves / provisions / historic write-downs

Shipping documentationShipping documentation

Creating a Hypothesis: Creating a Hypothesis:

Was there a scheme to…?Was there a scheme to…?

Testing the Hypothesis: “what if” scenarioTesting the Hypothesis: “what if” scenario

Review Review AR details at Zeo CZ / AP details at Zeo RUAR details at Zeo CZ / AP details at Zeo RU

Conduct transaction tracing (order to cash)Conduct transaction tracing (order to cash)

Review logistical documentation (shipping & transport Review logistical documentation (shipping & transport documentation)documentation)


Investigative Field WorkInvestigative Field Workandand

FindingsFindings


Field Work & FindingsField Work & Findings

Russia

Czech Republic

Zeo RU

Union Holding

2. Invoice in €

5. Order in Rubel

3. Delivery via forwarder

“Union Holding”1. Order in €

8. Payment in Rubel4.

1. Zeo RU had no foreign trade permission and no foreign currency account2. Zeo RU didn’t book the invoice from Zeo CZ5. 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%)?

7. Invoice in Rubel

Zeo CZ

FactoringCompanies

9. Payment in €

?

6. Delivery


Zeo RU places order for finished Zeo RU places order for finished goods with Zeo CZgoods with Zeo CZ

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

1

2

3



Zeo CR ships productsZeo CR ships products Shipping documentation showed goods Shipping documentation showed goods

picked up by a transport named picked up by a transport named “LeMans” and taken to a warehouse out “LeMans” and taken to a warehouse out side of Pragueside of Prague

From warehouse goods picked up by a From warehouse goods picked up by a transport company named “Rye”transport company named “Rye”

Goods dropped at an undisclosed Goods dropped at an undisclosed location for forwarding to Zeo RU location for forwarding to Zeo RU

3

4



Russia

Czech Republic

Zeo RU

Union Holding

2. Invoice in €

5. Order in Rubel







7. Invoice in Rubel

Zeo CZ

FactoringCompanies

9. Payment in €

?

6. Delivery



Goods disappear and presumable arrive Goods disappear and presumable arrive in Russia at an intermediary (“Union in Russia at an intermediary (“Union Holdings”)Holdings”)

Clue of possible route into Russia from Clue of possible route into Russia from customs stamps on domestic paperwork customs stamps on domestic paperwork

No evidence of customs duties being No evidence of customs duties being paidpaid

4

5



Russia

Czech Republic

Zeo RU

Union Holding

2. Invoice in €

5. Order in Rubel







7. Invoice in Rubel

Zeo CZ

FactoringCompanies

9. Payment in €

?

6. Delivery



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

Delivery of goods to Zeo RU by Delivery of goods to Zeo RU by Union HoldingsUnion Holdings

5

6

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

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

8



Russia

Czech Republic

Zeo RU

Union Holding

2. Invoice in €

5. Order in Rubel







7. Invoice in Rubel

Zeo CZ

FactoringCompanies

9. Payment in €

?

6. Delivery



Off-shore agents wire money (in Euros) Off-shore agents wire money (in Euros) either to Czech factoring companies to either to Czech factoring companies to the credit of Zeo CZ accounts or directly the credit of Zeo CZ accounts or directly to the accounts of Zeo CZto the accounts of Zeo CZ

Zeo CZ accounting staff received a Zeo CZ accounting staff received a phone call by an “individual” who phone call by an “individual” who provided details of which transactions provided details of which transactions money was wired formoney was wired for

9



Investigative ConclusionInvestigative Conclusion It was also determined that Union Holding It was also determined that Union Holding

and/or off-shore agents (believed to be one and/or off-shore agents (believed to be one in the same) took a 5% commission on in the same) took a 5% commission on transactiontransaction

18% VAT was raised on invoices by Union 18% VAT was raised on invoices by Union HoldingHolding

Benefit could have been as high as 20% of Benefit could have been as high as 20% of each transactioneach transaction


Investigative ConclusionInvestigative ConclusionConfirmedConfirmed Financial misstatementsFinancial misstatements KickbacksKickbacks

UnconfirmedUnconfirmed BriberyBribery


Former owners knew of and approved the Former owners knew of and approved the schemescheme

““one day” companiesone day” companies Eurotrans appeared to be the link between Eurotrans appeared to be the link between

movement of inventory and the paymentsmovement of inventory and the payments EUR 1’0 was missingEUR 1’0 was missing

Investigative ConclusionInvestigative Conclusion


Scheme(s) du jourScheme(s) du jour

Khalid MohiuddinKhalid Mohiuddin


The Future of Whistle BlowingThe Future of Whistle Blowing

Marc ShermanMarc Sherman


Thank-youThank-you

Question?Question?

conducting forensic accounting investigations

Documents

zeo trademark

competitor zeo

subsidiary of zeo

czech republic zeo cz

writeoff of receivables

acquisition zeus

supplier zeus

internal audit of receivables