Case studies

CASE STUDIES

Corporate Fraud – measures to detect and reduce

2009 has been an eventful year in which a number of corporate frauds have been perpetrated by high level trusted employees. These frauds have caused in some circumstances almost resulted in the insolvency of the organizations for which the employees worked.

Clive Peeters

Clive Peeters, a listed electrical retailer experienced significant cash flow problems as a result of the alleged misappropriation of funds committed by a senior financial accountant in its employ. The accountant, Ms Sonya Causer, is alleged to have stolen approximately $20 million by diverting creditor payments into her own bank accounts.

It transpires that Ms Causer utilized the funds for the purposes of her lifestyle and for the acquisition of a number of properties and shares in Clive Peeters.

Specialty Fashion Group

Another fraud involving a listed retailer was that pertaining to Specialty Fashion Group. The fraud costing approximately $16 million related to the alleged payment by a trusted employee of related party supplier invoices.
It is alleged that a long-time senior executive Mr Simon Feldman, stole approximately $16 million rom the company by invoicing the retailer for store renovations that never took place, using fictitious addresses. The fraud entailed the alleged payment by Mr Feldman of related party supplier invoices. It is understood that he pocketed some of the funds and used the rest to prop up some of his private business interests.
Railcorp

There have been investigations conducted by the Independent Commission Against Crime (ICAC)  in respect of a number of employees whom either paid fictitious supplier invoices or overpaid related party supplier invoices. It transpires that the funds were utilised predominantly for lifestyle purposes by the perpetrators.

Bank of Queensland

The financial industry itself has not been immune from fraudulent conduct.

A Brisbane bank employee was recently convicted of stealing $3 million, the proceeds of which were spent on lifestyle items including holidays and motor vehicles. More info
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Others?

How have the fraudulently obtained funds been disbursed?

In the majority of employee frauds the funds have been spend on lifestyle items including property, motor vehicles, holidays and gambling. In the Specialty Fashion Group situation it appears that the funds were diverted to business interests operated by Mr Feldman.

What measures can be adopted to detect and alleviate corporate fraud

The aforementioned frauds were all committed by persons whom performed accounting related functions within the affected organizations. These persons were trusted employees and had devised schemes whereby the frauds could be perpetrated for periods of time notwithstanding the presence of both internal and external audit systems.

The bottom line in respect of corporate fraud is that notwithstanding the application of techniques including profiling, data mining, analysis and the presence of internal and external audit that employees can always devise systems to perpetrate frauds and that these frauds may not be detected for a number of years.

http://www.nifa.co.uk/case_study.cfm?ID=14

Confiscation case dropped by Crown Office after acknowledging

Bernard Levin (The Times, October 15th 1991) wrote that “all estimates of booty mentioned in courts trying cases of alleged drug-dealing, whatever the context, should be divided by five if any serious approximation is to be had. All sums expressed as street value should be divided by nine.”
A confiscation proceedings case that was dropped by Crown Office this year illustrates the first point. A young jazz-fusion musician had inherited a house larger than he needed and allowed friends with a penchant for indoor gardening, particularly cultivation of cannabis plants, to rent rooms. When the musician’s house was visited by the police, he was arrested and served some time in prison after being convicted of drugs trafficking. The Crown Office served a Prosecutor’s Statement on him, accompanied by financial schedules that alleged that over six years he had benefited from crime to the total of over £123,000. Of this, only £38 was attributed to the value of the drugs found in his house. The musician had a girlfriend; although not living together the Crown Office included her bank accounts and income in calculating his alleged benefit. Despite the musician having a bank account, the Crown added statistics for household expenditure on to the figure for bank withdrawals to arrive at total spending. After recognising the iniquity of including the girlfriend’s financial affairs in its calculation, and acknowledging that it had “double-counted expenditure the Crown produced an amended calculation of benefit, this time below £27,000. Following a meeting the Crown acknowledged that this comprised legitimate income of £7,000, that it had omitted to remove some £6,000 of the girlfriend’s expenditure, and eventually conceded that another £13,000 was a transfer between bank accounts. At this point the Crown dropped the case, despite haggling over the legitimacy of cheques of £125, £110 and several birthday gifts of £40 from grandmother.
The lessons from this are that the Crown will accept as legitimate income supported by “vouching”, and will often withdraw the double-counting of expenditure as a first concession. However, the Crown is likely to be pernickety over relatively trivial amounts. Also, it does not use double-entry bookkeeping in calculating alleged benefit, and this omission leads to basic errors. Therefore, as a first step in examining a Prosecutor’s Statement, return to basics and translate Crown Schedules into financial statements that use double-entry.

Forensic Accountants a lot of hard work….

As two former Crown Prosecution Service employees are convicted of making more than £1m worth of bogus claims for taxi fares, suspicious employers could put their minds at rest – or find out if their concerns are valid – by getting a forensic accountant to go over their accounts. There are usually tell-tale signs that all is not as it should be and if an employer has any doubts, they should call in forensic accountants, who will look at a number of factors.

For example, they will check whether the member of staff is living beyond their means, having financial difficulties or having unusually close relationships with vendors. There will be other avenues to explore, such as the employee who refuses to take a holiday, as they are afraid that their theft will be detected by a replacement. The forensic accountant also won’t be fooled by an employee who continually works overtime or one who wants to take work home.

Excessive personal spending, such as new cars, fancy holidays by an employee whose income cannot support such extravagances are also giveaways and will be spotted by an eagle-eyed accountant. Meanwhile, in the case of the pair convicted this week, prosecuting counsel told the court that financial investigators were still attempting to trace the proceeds of the fraud.

The barrister said that on-going inquiries into international bank accounts were being made, as there is not currently any explanation for where the money has gone. He added that a forensic accountant is considering all the information so that a sentencing judge can be given a very clear idea of precisely what has happened to the money. No doubt by the time the two are sentenced in July, the money trail will have been thoroughly researched and their means of disposal of their ill-gotten gains revealed.

Finding the assets of criminals can be very difficult when people are determined to hide them but the case is made even more difficult when the perpetrators know exactly what they are doing, as in the recent case of two professionals who laundered more than £1.8m of criminal cash from VAT fraud.

However, forensic accountants, such as those used by HM Revenue & Customs (HMRC), who brought the case, are trained to look beyond what is presented as ‘normal’ and deal with the business realities of situations.

The investigative team found the trail of money, which had been laundered through a complex web of bank accounts, first in Greece, Cyprus and Switzerland and then through banks in the UK.

They did this through investigating and analysing the financial and other evidence and then communicating their findings to HMRC in the form of reports and collections of documents.

There is no record as to whether the accountants involved assisted in the legal proceedings or testified in court as expert witnesses but this is all part of the job for the forensic accountant.

Of course, forensic accountants are also routinely used to find out where assets have been hidden once criminals have had confiscation orders served on them according to the rules of POCA.

As they were jailed for a total of six and a half years, a spokesperson for HMRC said that a confiscation hearing to recover the criminal proceeds of the fraud will take place towards the end of this month, before which no doubt the forensic accountants will be hard at work.

As a high-flyingLondonbarrister starts a three-and-a-half year sentence for evading VAT over a twelve year period, investigative accountants must start the lengthy process of finding the cash he withheld from HM Revenue & Customs (HMRC). Rohan Pershad was deregistered for VAT in 2000 following a history of failure to submit tax returns and to tell the taxman about a change of address. This meant that he was unable to trade legally over the VAT threshold, which was £54,000 at the time and rose to £67,000 in 2008. However, his self-assessment tax return in 2001 showed that his income had increased from £85,000 in 2001 to £346,000 in 2008, meaning that he was breaching the VAT registration limit by £279,000.

HMRC argued in court that Pershad was using his invalid VAT number on fee notes to charge VAT but then pocketing the money rather than paying it to HMRC. Investigative accountants employed by HMRC will now begin to trace the cash, as confiscation proceedings are now underway, which means that money can be legally recovered under the Proceeds of Crime Act 2002 (POCA).

There is huge political pressure to maximise confiscations under POCA, so the accountants will scrutinise every aspect of Pershad’s life, from bank accounts to lifestyle. Since HMRC says that Pershad spent the money he made on two homes in Surrey andSomersetand on school fees for his children, the accountants will investigate these claims first but may well unearth other money trails.