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Conducting Forensic Accounting Investigations Panelists: Marc Sherman Khalid Mohiuddin Moderator: Darryl Neier.

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Presentation on theme: "Conducting Forensic Accounting Investigations Panelists: Marc Sherman Khalid Mohiuddin Moderator: Darryl Neier."— Presentation transcript:

1 Conducting Forensic Accounting Investigations Panelists: Marc Sherman Khalid Mohiuddin Moderator: Darryl Neier

2 21st Annual ECI Conference Agenda Investigative Process Investigative Process Case Study Case Study Investigative Conclusion Investigative Conclusion Scheme(s) du jour Scheme(s) du jour The Future of Whistle Blowing The Future of Whistle Blowing

3 21st Annual ECI Conference Reasons to Investigate External/Internal Audit finding(s) External/Internal Audit finding(s) Employee allegation(s) of fraudulent conduct Employee allegation(s) of fraudulent conduct Management review(s) Management review(s) Vendor/Customer complaint(s) Vendor/Customer complaint(s) Government subpoena Government subpoena Other anomalies – data analyses Other anomalies – data analyses

4 21st Annual ECI Conference Inherent Risk Expensive and uncertain results Expensive and uncertain results Legal liability – failure to protect privilege Legal liability – failure to protect privilege Uncover significant information Uncover significant information Stimulate disgruntled employees & angst Stimulate disgruntled employees & angst Adverse publicity Adverse publicity Preoccupied resources Preoccupied resources Business disruptions Business disruptions

5 21st Annual ECI Conference Establish Predication – Initiate Investigation Predication Predication Assemble the team Assemble the team Competency of team members Competency of team members Non-destructive communication Non-destructive communication Attorney-Client privilege Attorney-Client privilege Whistleblower protection Whistleblower protection Confidentiality of allegation Confidentiality of allegation

6 21st Annual ECI Conference The Fraud Team – A Daily Chore Fraud Examiners Fraud Examiners Auditors Auditors Security Security Human Resources Personnel Human Resources Personnel Management Representative Management Representative Outside Consultant Outside Consultant Legal Counsel Legal Counsel Information Systems Personnel Information Systems Personnel

7 21st Annual ECI Conference Early Stages Background and understanding Background and understanding Gathering information Gathering information Coordinating team responsibilities Coordinating team responsibilities Identify a project manager – team leader Identify a project manager – team leader Communication protocol Communication protocol Activate fraud response plan Activate fraud response plan Attorney client privilege ?? Attorney client privilege ??

8 21st Annual ECI Conference 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 21st Annual ECI Conference Zeo Case Study The case of the “Houdini” inventory

10 21st Annual ECI Conference Zeo Case Study Zeus Inc. is a large computer components manufacture and supplier 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 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 Due to the ability in offering lower price points, Zeo Ltd. is seen as the greatest threat in the developing markets

11 21st Annual ECI Conference Zeo Case Study Zeus Inc. acquires Zeo Ltd. which was privately owned by 6 individuals 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 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 Zeus Inc. decides to continue to run the operation with the “Zeo” trademark

12 21st Annual ECI Conference Zeo Case Study Three of six former owners remain with Zeo Ltd. after acquisition 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. Several family members of former owners also continue to remain employed with Zeo Ltd.

13 21st Annual ECI Conference Zeo Case Study After the acquisition Zeus Inc. decides to perform an internal audit of receivables due to unusual transactions After the acquisition Zeus Inc. decides to perform an internal audit of receivables due to unusual transactions EUR 4’0 write-off of receivables and EUR 1’0 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). EUR 4’0 write-off of receivables and EUR 1’0 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 21st Annual ECI Conference Predication After acquisition…Zeus Inc. discovers unusual transactions related to inter- company sales at Zeo Ltd. EUR 4’0 write-off of receivables resulting from an “import methodology” at the parent company and a EUR 1’0 write-off of inventory at a subsidiary Investigation started by Zeus Inc.

15 21st Annual ECI Conference Analysis Chart Develop Fraud Theory Where is the evidence likely to be?

16 21st Annual ECI Conference 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 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 10’4. Found that Zeo CZ made inter-company sales to Zeo RU totalling EUR 10’4. Internal Audit tested 23 items (EUR 5’0) from the sales ledger Internal Audit tested 23 items (EUR 5’0) from the sales ledger

17 21st Annual ECI Conference Suspicious transactions Of the 23 transactions tested, matching payment amounts for 17 transactions (EUR 4’0) were received from “factoring companies” by Zeo CZ. Of the 23 transactions tested, matching payment amounts for 17 transactions (EUR 4’0) were received from “factoring companies” by Zeo CZ. Payments in respect of the remaining 6 sampled transactions (EUR 1’0) were still outstanding at the time of the audit and reflected as open accounts receivable Payments in respect of the remaining 6 sampled transactions (EUR 1’0) were still outstanding at the time of the audit and reflected as open accounts receivable

18 21st Annual ECI Conference Zeo Case Study Analyzing available data: 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: Creating a Hypothesis: Was there a scheme to…? Testing the Hypothesis: “what if” scenario Testing the Hypothesis: “what if” scenario Review AR details at Zeo CZ / AP details at Zeo RU  Review AR 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 documentation)  Review logistical documentation (shipping & transport documentation)

19 21st Annual ECI Conference Investigative Field Work and Findings

20 21st Annual ECI Conference Field 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 Rubel Zeo RU had no foreign trade permission and no foreign currency account 2. Zeo RU didn’t 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%)? 7. Invoice in Rubel Zeo CZ Factoring Companies 9. Payment in € ? 6. Delivery

21 21st Annual ECI Conference Zeo RU places order for finished goods with Zeo CZ Zeo RU places order for finished goods with Zeo CZ Zeo CZ fills order and raises invoice against the customer Zeo RU in the Zeo CZ accounting system Zeo CZ fills order and raises invoice against the customer Zeo RU in the Zeo CZ accounting system Field Work & Findings

22 21st Annual ECI Conference Zeo CR ships products Zeo CR ships products Shipping documentation showed goods picked up by a transport named “LeMans” and taken to a warehouse out side of Prague 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” From warehouse goods picked up by a transport company named “Rye” Goods dropped at an undisclosed location for forwarding to Zeo RU Goods dropped at an undisclosed location for forwarding to Zeo RU 3 4 Field Work & Findings

23 21st Annual ECI Conference 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 Rubel Zeo RU had no foreign trade permission and no foreign currency account 2. Zeo RU didn’t 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%)? 7. Invoice in Rubel Zeo CZ Factoring Companies 9. Payment in € ? 6. Delivery Field Work & Findings

24 21st Annual ECI Conference Goods disappear and presumable arrive in Russia at an intermediary (“Union Holdings”) Goods disappear and presumable arrive in Russia at an intermediary (“Union Holdings”) Clue of possible route into Russia from customs stamps on domestic paperwork Clue of possible route into Russia from customs stamps on domestic paperwork No evidence of customs duties being paid No evidence of customs duties being paid 4 5 Field Work & Findings

25 21st Annual ECI Conference 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 Rubel Zeo RU had no foreign trade permission and no foreign currency account 2. Zeo RU didn’t 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%)? 7. Invoice in Rubel Zeo CZ Factoring Companies 9. Payment in € ? 6. Delivery Field Work & Findings

26 21st Annual ECI Conference Zeo RU places order in rubles of identical order to Zeo CR on Union Holdings Zeo RU places order in rubles of identical order to Zeo CR on Union Holdings Delivery of goods to Zeo RU by Union Holdings Delivery of goods to Zeo RU by Union Holdings Invoice by Union Holdings to Zeo RU (in rubles) Invoice by Union Holdings to Zeo RU (in rubles) Payment by Zeo RU to Union Holdings (in rubles) Payment by Zeo RU to Union Holdings (in rubles) 8 Field Work & Findings

27 21st Annual ECI Conference 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 Rubel Zeo RU had no foreign trade permission and no foreign currency account 2. Zeo RU didn’t 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%)? 7. Invoice in Rubel Zeo CZ Factoring Companies 9. Payment in € ? 6. Delivery Field Work & Findings

28 21st Annual ECI Conference 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 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 Zeo CZ accounting staff received a phone call by an “individual” who provided details of which transactions money was wired for 9 Field Work & Findings

29 21st Annual ECI Conference 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 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 18% VAT was raised on invoices by Union Holding Benefit could have been as high as 20% of each transaction Benefit could have been as high as 20% of each transaction

30 21st Annual ECI Conference Investigative Conclusion Confirmed Financial misstatements Financial misstatements Kickbacks KickbacksUnconfirmed Bribery Bribery

31 21st Annual ECI Conference Former owners knew of and approved the scheme Former owners knew of and approved the scheme “one day” companies “one day” companies Eurotrans appeared to be the link between movement of inventory and the payments Eurotrans appeared to be the link between movement of inventory and the payments EUR 1’0 was missing EUR 1’0 was missing Investigative Conclusion

32 21st Annual ECI Conference Scheme(s) du jour Khalid Mohiuddin

33 21st Annual ECI Conference The Future of Whistle Blowing Marc Sherman

34 21st Annual ECI Conference Thank-youQuestion?


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