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Conducting Forensic Accounting Investigations

Conducting Forensic Accounting Investigations. Panelists: Marc Sherman Khalid Mohiuddin. Moderator: Darryl Neier. Agenda. Investigative Process Case Study Investigative Conclusion Scheme(s) du jour The Future of Whistle Blowing. Reasons to Investigate.

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Conducting Forensic Accounting Investigations

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  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 21st Annual ECI Conference

  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 21st Annual ECI Conference

  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 21st Annual ECI Conference

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

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

  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 ?? 21st Annual ECI Conference

  8. ProvingIntent Present evidence in chronological order. (Timing of key transactions) Find altered, concealed, or destroyed documents or evidence (e.g., deliberate backdating.) Look for pattern or repetition of suspicious behavior. Obtain a confession Obtain testimony of co-conspirator. 21st Annual ECI Conference

  9. ZeoCaseStudy The case of the “Houdini” inventory 21st Annual ECI Conference

  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 21st Annual ECI Conference

  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 21st Annual ECI Conference

  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. 21st Annual ECI Conference

  13. Zeo Case Study 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). 21st Annual ECI Conference

  14. 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. 21st Annual ECI Conference

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

  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 10’4. • Internal Audit tested 23 items (EUR 5’0) from the sales ledger 21st Annual ECI Conference

  17. Suspicious transactions • 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 21st Annual ECI Conference

  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) 21st Annual ECI Conference

  19. Investigative Field WorkandFindings 21st Annual ECI Conference

  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 forwarder“Union 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 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%)? 21st Annual ECI Conference

  21. Zeo RU places order for finished goods with Zeo CZ Field Work & Findings 1 2 • Zeo CZ fills order and raises invoice against the customer Zeo RU in the Zeo CZ accounting system 3 21st Annual ECI Conference

  22. 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 Field Work & Findings 3 4 21st Annual ECI Conference

  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 forwarder“Union 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 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%)? 21st Annual ECI Conference

  24. 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 Field Work & Findings 4 5 21st Annual ECI Conference

  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 forwarder“Union 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 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%)? 21st Annual ECI Conference

  26. Zeo RU places order in rubles of identical order to Zeo CR on Union Holdings Field Work & Findings 5 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) 21st Annual ECI Conference

  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 forwarder“Union 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 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%)? 21st Annual ECI Conference

  28. 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 Field Work & Findings 9 21st Annual ECI Conference

  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 21st Annual ECI Conference

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

  31. 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 1’0 was missing Investigative Conclusion 21st Annual ECI Conference

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

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

  34. Thank-you Question? 21st Annual ECI Conference

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