forensic autopsies: inside real-life fraud investigations

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Fraud Autopsies: Inside Real-Life Fraud InvestigationsWhen Internal Controls Fail Or Fail to Exist Devastation Strikes!

Frank A. Suponcic, CPA, CFE, CFFFebruary 28, 2017

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WHAT DO I DO?

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Click to edit Master title styleClick to edit Master text stylesSecond levelThird levelFourth levelFifth levelAbout ABC Company:Cleveland-area medical services companyS corporationWas owned equally by two individuals each earning an annual salary of $360,000 One owner focused on the technical aspects of the business while the other owner was strictly administrativeThey both shared the same officeand even faced each other every day. The administrative owner was so highly regarded that he was chosen to be the best man in the technical owners wedding.

CASE #1: ABC COMPANY


Fraud covered five years before detected by accidentIt took nearly 18 months to secure all of the documents that enabled us to draw our conclusions as to the different types and magnitude of the various fraudsTo this date, the nearly $7M of misappropriations identified in this case formed the basis of the largest forensic case we have investigatedJust what does one do with $7M in stolen funds?Despite the material loss of funds, the company remains in business todayCASE #1: ABC COMPANY


DiscoveryThe participantsThe investigationExpansive methodsCriminal conviction for income tax evasionSentencing and restitutionInternal controlsLines of defense

What preventive controls might have stopped this?


Click to edit Master title styleClick to edit Master text stylesSecond levelThird levelFourth levelFifth levelMethods of Theft:Unauthorized officer compensation ($1.6M)Bogus payroll and employee benefit deductions Unauthorized credit cardsUnauthorized home equity line paymentsPersonal expenditures on corporate credit cards ($3.4M)

What detective controls might have caught this?


Click to edit Master title styleClick to edit Master text stylesSecond levelThird levelFourth levelFifth levelMethods of Theft:Personal payments with corporate checksFraudulent electronic transfers to personal accounts of family members and a trustFictitious employeesTheft of co-owners and former employees paychecksCash receipt diversion



Click to edit Master title styleClick to edit Master text stylesSecond levelThird levelFourth levelFifth levelOther Matters of Concern:Under-reporting of wages and withholding to city ($637K of withholding not paid)Under-payment of Ohio Workers Compensation premiums ($202K)Penalties NOT associated with the actual theftFraudulent federal corporate and individual income tax returnsConvicted for?Sentence


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About DEF CompanyNationally recognized privately held Ohio manufacturer with distribution outlets in every stateCompany president has an exhaustive schedule, constantly traveling throughout the U.S. As a result, he requires an accountant to manage his personal financial affairs and those of a smaller related entity. His paychecks fund the operations of the related entity.The accountant, highly recommended by his previous employer, and earning an annual salary of $100,000, began his employment with DEF in 2002. In 2004, he was promoted to handle the financial matters of DEFs president. CASE #1: DEF COMPANY


Fraud went undetected for over six yearsLength of investigation Fraud discovered by accident. Employee was restructured out of the position enabling him to commit the crimeRecipe for disaster: Trusted employee Worked aloneMinimal supervisionFew internal controls$2M embezzlementWhat preventive controls might have stopped this?

CASE #2: DEF COMPANY


Methods of Theft:Expense report fraudUnauthorized credit card transactionsPayments to cash and to the thief directlyDirect payments for personal credit cards

Only six monthly expense reports were substantiated77% of all disbursements lacked substantiation


Click to edit Master title styleClick to edit Master text stylesSecond levelThird levelFourth levelFifth level605 QuickBooks payee disbursement alterations concealed the embezzlement

133 direct payments $430K179 checks payable to cash $185K18 personal expenditures $46K129 payments to three different credit card companies $995K605 fraudulent corporate credit card charges $324K


Click to edit Master title styleClick to edit Master text stylesSecond levelThird levelFourth levelFifth levelThe Target:Gave away some of the stolen money in order to feel loved as he suffered from very low self-worthHoarded many unauthorized purchasesRe-paid $435KLiquidated all real estate and personal assetsPled guilty to aggravated theftSentenced to six years in prison



Click to edit Master title styleClick to edit Master text stylesSecond levelThird levelFourth levelFifth levelAbout GHI Company:Cleveland-area scrap-related companyOwned by a father and son who were both highly technologically knowledgeable in this competitive industry Client of the firmwhile we had assisted them in a prior litigation support matter, the engagement did not involve an internal misappropriationSelling the need for a preventive forensic assessment is challenging. Recognizing a red flag, GHI engaged us to review their existing internal controls and provide suggestions for enhancement. CASE #3: GHI COMPANY


One of the five employees interviewed by us for an internal control assessment (with 40 recommendations) was later convicted of a $330,000 payroll-related embezzlement. How could this have happened?Immense managerial trust: Longtime employeeRed flags and internal control weaknesses were present Theft occurred over 9+ yearsNegative payroll deductionsA background check would have disclosed his criminal past

CASE #3: GHI COMPANY


Pled guilty to theftComplete restitutionSentenced to five years probation and 30 weekends in jailFailed to report theft income on Form 1040

CASE #3: GHI COMPANY

Click to edit Master title styleClick to edit Master text stylesSecond levelThird levelFourth levelFifth levelSix employees conspired to kill this trucking company so that they could start up a competing businessWillful destruction of accounting recordsGift card abuse/rebate theft/petty cash theftTheft of fuel, vehicles and other assetsPayroll/HR sick and vacation abuseLack of evidence did not allow a criminal indictment

CASE #4: JKL TRUCKING

Click to edit Master title styleClick to edit Master text stylesSecond levelThird levelFourth levelFifth level50-year-old single motherPigs get fat, hogs get slaughteredDiscovered by chance by a temporary workerUsed erasable inkPled guilty to theftSentenced to five years probation

CASE #5: DR. COACH

Click to edit Master title styleClick to edit Master text stylesSecond levelThird levelFourth levelFifth levelPart-time bookkeeperbeginning salary $18,000Sloppy work, many payroll tax compliance errorsExecutive requests a forensic investigationSalary increased to $26,000 + perksA year later, her salary was $250,000fired!Sued for wrongful terminationCASE #6: MNO COMPANY

Click to edit Master title styleClick to edit Master text stylesSecond levelThird levelFourth levelFifth levelEffective internal controls are critical in minimizing fraudFinancial greed and need are powerful motivatorsFrauds can occur undetected for a long time. Time = MoneyForensic investigations are not cheapInternal control assessments, if recommendations are implemented, are a prudent expenditure of fundsObserve employeesdoes lifestyle match earnings?Trust can be easily broken (assuming it ever existed)

TAKEAWAYS


Background and Credit ChecksSetting the anti-fraud tone at the topMandatory vacation and job rotation (if possible)Fraud risk assessmentEmployee educationStand-alone written fraud policy

SUGGESTIONSFRAUD PREVENTION


Use of External Internal AuditorsSurprise Fraud AuditsWhistle-Blower Incentive ProgramsFraud HotlineTest the Internal ControlsBond Your EmployeesForensic Review

SUGGESTIONSFRAUD PREVENTION

Controls, Controls, Controls!


Frank A. Suponcic, CPA, CFE, CFFPartner, Valuation and Litigation Advisory ServicesSkoda Minotti CPAs, Business and Financial Advisors

[email protected] more information, please visit skodaminotti.com/vlasand click on Litigation

CONTACT ME

company/skoda-minotti@SkodaMinotti/SkodaMinotti
