Corruption, embezzlement, asset stripping. Do you really think they don’t affect you?

XYZ Telecom is a well-established telecommunications company operating in the area of fixed telephone lines. Consolidation of the fixed-line market places great emphasis on cost control. The company owners are fully aware of this situation and a year ago the general manager was assigned to reduce costs by 10%. But this initiative still does not bring the desired results, and furthermore, the owners suspect that control of funds is being stripped away from the company. The owners therefore asked APOGEO to carry out a forensic audit.

The first step by the forensic team is an unannounced visit to the company in order to obtain all relevant documentation.
The obtained documents in particular include:

• contracts
• invoices
• bank account and credit card statements
• delivery notes
• all accounting transactions for the past three years
• valid internal procedures

The documents are gathered in one room that only the forensic auditors are allowed to enter. This measure prevents modification of the documents. Interviews with all supervisors follow. Based on these interviews, the team identifies several risk areas, such as:

• purchasing (high volumes, absence of selection procedures)
• bonuses paid to employees (high bonuses for some positions)
• expenses paid by credit cards (high amounts)
• receiving of goods/services (settlement of invoices without confirmation of the goods receipt).

In the next step, the team will conduct a detailed analysis of the individual accounting transactions, comparing the documents and factual data with accounting records, assessing compliance of reality with the valid internal procedures, etc. The findings are continuously presented to the individual supervisors.
The forensic investigation of this case can reveal the following findings:

• Mr. Petr S., the Marketing Department Manager, purchases press advertisement from the ABC Media agency. The purchasing turnover analysis shows a year-by-year increase in the volume of purchases from this supplier, but the volume of published advertisements has not changed significantly. When comparing the advertisement space with other agencies, the auditors discover that the company purchases press advertisements for a price that is on average three times higher than usual. When confronted with this information, Mr. Petr S. reacts excitably, arguing that the auditors do not have the required knowledge of the marketing segment, and that they are very satisfied with the services provided by this agency. In addition, analysis of interrelated entities indicates the existence of “irregular” relationships with the ABC Media agency, the Director of which is Mr. Petr S’s brother. An analysis of e-mail documentation shows that the prices were artificially increased by agreement of both parties.
• Ms. Monika T., the Commercial Department Director, receives unusually high bonuses. The amount of bonuses paid to her in the past year exceeds her annual salary. The bonuses are allocated to her by the general manager, Mr. Martin J., as a percentage of completed sales. But an analysis of the bonus payment documentation indicates that there is no data justifying the bonus amount. The general manager is not able to justify the amount of the allocated bonuses when requested to do so. In addition, in line with the applicable wage regulation, the general manager is not authorized to allocate these bonuses without the approval of the Board of Directors. The people in the company say that Ms. Monika is having an affair with the general manager.
• When analyzing documentation related to delivered goods and services, the auditors discover that some invoices were paid to the supplier without the goods having been delivered. A detailed analysis of the accounting transaction shows that several invoices in the total amount of CZK 6 million were paid twice.

Based on these findings, the owners suspend the General Manager and the company orders the Commercial Director to return the bonuses paid without authorization. A complaint against the General Manager and the Marketing Director for violation of the trustee’s obligation is lodged. The suppliers are asked to return the amounts paid without authorization (non-delivered goods, invoices paid twice).

Based on the forensic audit recommendations, the company implements the following changes to avoid the occurrence of fraudulent acts:

• all major suppliers must be selected through a transparent selection procedure;
• the company issues an Ethics Code which, among other things, requires employees to report possible conflicts of interests;
• the accounting system is equipped with monitoring, to avoid entry and payment of duplicate invoices;
• a new system of invoice circulation and authorization is installed; payment of invoice always requires confirmation of the goods/service receipt.

In the process of implementing changes to avoid fraudulent or uneconomical behaviour, the forensic auditors assist in setting the individual controls in order to make them as efficient as possible.

So this is a typical forensic audit in a nutshell. In practice, the individual specifications can differ significantly based on the situation and requirements of the client. In general, the forensic audit is used wherever settlement of commercial and financial affairs could result in any kind of litigation. The targets are organizations which suspect that fraud or other unethical or illegal financial or commercial conduct has been committed, as well as organizations that have become participants in litigations or legal disputes. The broken relationships with customers and suppliers, loss of reputation and employee morale, and the time invested by the company management are all major setbacks. An independent investigation led by specialists, support and consultancy are then needed to resolve the problems quickly and efficiently.

Dr. Antonín Šenfeld
Manager Forensic & Special Services