Conducting Forensic Accounting Investigations Moderator Panelists Darryl Neier

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

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

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

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

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

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

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

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

Zeo Case Study n Zeus Inc. is a large computer components manufacture and supplier n Zeus Inc. contemplates the purchase of a competitor (Zeo Ltd. ) whose target market is medium to lower grade products in developing European countries n Due to the ability in offering lower price points, Zeo Ltd. is seen as the greatest threat in the developing markets 21 st Annual ECI Conference

Zeo Case Study n Zeus Inc. acquires Zeo Ltd. which was privately owned by 6 individuals n Zeo Ltd. has primary operations in Czech Republic (Zeo CZ) and 5 other developing European nations n Zeus Inc. decides to continue to run the operation with the “Zeo” trademark 21 st Annual ECI Conference

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

Zeo Case Study n After the acquisition Zeus Inc. decides to perform an internal audit of receivables due to unusual transactions n 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). 21 st Annual ECI Conference

Predication After acquisition…Zeus Inc. discovers unusual transactions related to intercompany 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. 21 st Annual ECI Conference

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

Suspicious transactions The Internal Audit team conducts an audit at Zeo CZ and Zeo RU n Reviewed transactions in sales ledger of Zeo CR from January 1, 2007 to September 30, 2008 n Found that Zeo CZ made inter-company sales to Zeo RU totalling EUR 10’ 4. n Internal Audit tested 23 items (EUR 5’ 0) from the sales ledger 21 st Annual ECI Conference

Suspicious transactions n Of the 23 transactions tested, matching payment amounts for 17 transactions (EUR 4’ 0) were received from “factoring companies” by Zeo CZ. n 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 21 st Annual ECI Conference

Zeo Case Study n n 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…? n 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) 21 st Annual ECI Conference

Investigative Field Work and Findings 21 st Annual ECI Conference

Field Work & Findings ? Union Holding 5. Order in Rubel Factoring Companies 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 € sia Rus ch Cze ic bl epu R Zeo CZ 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 21 st Annual ECI Conference Import duties (15%)?

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

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

Field Work & Findings ? Union Holding 5. Order in Rubel Factoring Companies 6. Delivery 7. Invoice in Rubel Zeo RU 8. Payment in Rubel 4. 3. Delivery via forwarder “Union Holding” 1. Order in € 9. Payment in € 2. Invoice in € sia Rus ch Cze ic bl epu R Zeo CZ 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 21 st Annual ECI Conference Import duties (15%)?

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

Field Work & Findings ? Union Holding 5. Order in Rubel Factoring Companies 6. Delivery 7. Invoice in Rubel Zeo RU 8. Payment in Rubel 4. 3. Delivery via forwarder “Union Holding” 1. Order in € 9. Payment in € 2. Invoice in € sia Rus ch Cze ic bl epu R Zeo CZ 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 21 st Annual ECI Conference Import duties (15%)?

Field Work & Findings 5 n Zeo RU places order in rubles of identical order to Zeo CR on Union Holdings 6 n Delivery 7 n Invoice 8 n Payment of goods to Zeo RU by Union Holdings to Zeo RU (in rubles) by Zeo RU to Union Holdings (in rubles) 21 st Annual ECI Conference

Field Work & Findings ? Union Holding 5. Order in Rubel Factoring Companies 6. Delivery 7. Invoice in Rubel Zeo RU 8. Payment in Rubel 4. 3. Delivery via forwarder “Union Holding” 1. Order in € 9. Payment in € 2. Invoice in € sia Rus ch Cze ic bl epu R Zeo CZ 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 21 st Annual ECI Conference Import duties (15%)?

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

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

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

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

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

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

Thank-you Question? 21 st Annual ECI Conference