Simon 0:06

Welcome back to Fraud Files. My name is Simon, and I'm the interviewer on this podcast, which brings you real life case files and forensic insights into a number of white collar frauds, financial crimes and misdemeanours that your host Edward has personally encountered, and in some cases brought to light, during his financial, corporate and business career. He shines the spotlight on both the frauds and the perpetrators. Edward. in this episode you're going to delve into the area of white collar fraud in corporate environments.

0:37

Yeah, I'm going to go through, a case study on a particular company and how its poor accounting systems and procedures and its weak internal controls left the company exposed and at risk from white collar fraud within the organization.

Simon 0:53

I suppose your auditing background gave you a strong technical base in this area.

0:57

Yes, I, I have an auditing background and a good deal of experience in, different accounting environments. I trained as an accountant in the audit divisions of two of the largest and. Most prestigious accounting firms in the world. And I reached the, the position of, senior audit manager and I, I pride myself on being thorough and meticulous. And throughout my career I've always been an an advocate of the need for high standards of corporate governance and high ethical standards in the workplace. And I think I've developed a sixth sense for when there are warning signs present of fraud, or when a specific accounting environment leaves a company open to an increased risk of fraud. I have the skillset to be able to quickly assess any particular accounting environment and to identify if there are deficiencies in the accounting and finance functions. So I would consider such factors as the effectiveness of management oversight, the extent of the management and control environment, the level and effectiveness of internal controls, the checks and balances in the system. Things like segregation of duties, the robustness of accounting systems and procedures and so on. If there's deficiencies and weaknesses in any of these, that's invariably going to lead to an increased risk of fraud within an organization. But you have to remember that auditing techniques are designed to review and assess the accuracy of the recorded financial information, and they're primarily to substantiate, to verify, to reconcile, to investigate, and to challenge. While the prevention of fraud is primarily a responsibility of the directors of a company, auditors will often uncover fraud during the course of their work.

Simon 2:46

Were you working for this particular company and if so how did the job go

2:50

So a number of years ago, I was hired in a contract role on a short term assignment. in a senior finance role, uh, with a European property group that was operating in a growing niche sector of the real estate market. And they had, offices and property developments throughout Europe. The group had financial backing from institutional investors in the us. They had a growing revenue base and a strong balance sheet. And in the office where I was working, there was approximately a hundred people there including the senior management team. My tasks and responsibilities were primarily to assist the finance team with the preparation of the financial year end numbers for the consolidated group and to interface with the external auditors, who were a leading international accounting firm. And I was also interfacing and communicating with the other UK based. And overseas entities in the group in relation to the audit. And I was, uh, preparing schedules for the auditors, answering the auditor's queries. And generally I was there to make sure that the year end consolidated financial statements were correctly stated and that there was a clean and efficient audit. But little did I know that during my short time working there that I would uncover facts and raise issues that would unexpectedly trigger multiple complications. And expose widespread deeper issues about risk and compliance and steps were then taken to silence me, which I'll go on to explain when I opened a can of worms.

Simon 4:32

When did you first start to have heightened concerns about the finance function there

4:37

Well, after some initial problems getting set up on the IT systems, I was eventually up and running, uh, with the assignment. Despite encountering what I can only describe as an unwieldy finance and accounting environment. It was very time consuming to locate and retrieve supporting documents and gather the underlying information for the auditors. Anyway, in my second week on the job and I was working through the various accounts and so on and so forth, I identified an accounting error to the tune of 1.3 million. Uh, it was an over accrual of a success fee that was to be paid to an investment bank. A well-known investment bank that had been, uh, assisting the, the group to raise, equity finance, from a US partner. And, uh, the over accrual was made because, uh, uh, part of the, uh, success fee had already been paid pre-year end. And therefore there was no need to accrue for that as it was already paid. So I thought that was a bit strange, um, how such a large over accrual could have gone unnoticed, for what was a particularly, unique transaction. And, I also noticed that the actual payment itself that had been made pre-year. When I compared it back to the original, uh, terms of reference and, the fee, information. There seemed to be an overpayment of about $125,000. And, when you really looked into it. There was some specific parameters as to how the payment should be calculated. So, we have this over accrual. This what appears to be an excess payment. Anyway, I did what I could do, uh, as far as I could take it. And then I brought all this to the attention of, uh. The finance director, who agreed with me about the required adjustment to the accounts and in respect of the overpayment, he said, well, that would've been approved, uh, that overpayment would've been approved by the chief operating officer. So I, I taken it to where I could take it in that, in that regard. But clearly, you know, that didn't sort of sit well with me overall. But anyway, I got on with my work and I, the next area I was delving into was I was doing some detailed work on the accounts payable. So the accounts payable is money that the group and the companies owe, to other parties. And, I started to discover a number of significant errors in a number of the supplier accounts. And I was sort of surprised by this because when I was being set up with the work, I'd been informed that a, a full review of the accounts payable had already been carried out by the financial controller. The sort of issues we're talking about were some invoices had been paid twice. I saw payments that were being made without any invoices being posted or any other documentation being presented. And numerous invoices were posted twice, so posted to the ledgers twice. So that's you're talking about. Then you've got inaccurate management and financial information about the money that's, uh, due to the creditors. Some of the amounts were quite substantial. Um, invoices posted twice, 90,000 for a health insurance scheme. One supplier had more than 200,000. Pounds worth of invoices posted twice. So we have a bit of a mess going on there. There was an instance where one employee had been overpaid his travel expense claim by, by more than 10,000 pounds. And that was only rectified I obtained back from the individual. Uh, some seven months later, there were payments being made out by direct debits that I saw going through the accounts, um, for months after the service that was giving rise to the direct debits having been terminated. And why weren't they stopped when the service stopped? So we were paying people for nothing. And of course people were not, you know, these, external suppliers. Or external service providers weren't rushing back to tell them, tell people that they'd been overpaid. So there was a sense of this overpayments and, um, difficulty to get underlying documentation. There was no substantiation. Uh, of balances at year end against supplier statements, which would be a, a good control procedure to have, just to make sure that the, accounts payable reconciliations are done. And to make sure, that should be a standard procedure to verify the accuracy. So all, all these sort of weaknesses increase the possibility of fraud going undetected. And it also crossed my mind, you know, the earlier over accrual that I'd found and, the fact that when I was looking at that particular situation, um, what also appeared strange to me was that a senior managing director at the investment bank had been seeking to invoice an additional amount for the success fee for the fundraising. So, effectively wanted the invoice, a second invoice put through for a large amount, $1.5 million. And, I thought, well, do they know something about this weak accounting system, an accounts payable system? Were people taking advantage of that on the outside? I don't know. It's difficult to, without delving really deep into it's difficult to really know. All I could do was to bring all of these things to the attention of my superiors, um, were, who were permanent, uh, employees there, uh, in the finance team. And of course I was simply, uh, you know, a contractor, doing my job.

Simon 9:40

So you started to feel some push back and some heat from within the organisation

9:45

So, uh, I continued to press on and, make headway with my work. But in a number of instances when I was pulling together, supporting documentation for the auditors. You, you know, I then go and follow up with certain people in the organization to get that information or whatever. Um, and I, I, I, started to become uncomfortable with answers that were being given to my queries by some of the people in the, uh, in the finance team and also in departments, uh, like the IT department and other departments outside of the finance team. Um, so, I, I wasn't getting good quality answers to some of the queries. And in some cases I wasn't being given any answers at all to certain queries. Um, my, requests for information were being dismissed. And, I, I was effectively being sort of. Told to sort of back off by certain people in the, uh, particularly in the finance department, um, from, investigating these areas any further. And of course, this set the alarm bells ringing for me. Uh, uh, I started to form the view that a certain individual or certain individuals in the organization, uh, may be acting with impunity after about a month into my, into my assignment, I noticed that the financial controller started to become very difficult and hostile towards me. I was promptly bringing any accounting issues and possible audit adjustments to the attention of the finance director, the financial controller, so that they would be aware of the issues, uh, before the auditors came to, to see them. Anyway, both the finance director and the financial controller started to give me the cold shoulder. And the financial controller in particular started undermining my involvement with the auditors checking up on me. And, the person seemed particularly keen to get me to finish my work as soon as possible.

Simon 11:32

It seems that there was an orcastrated attempt by certain individuals to stop you in your tracks. What next.

11:38

Well, just to say that separately, the Chief financial Officer, the CFO, who was located in a, in a different, part of the building. So outside of the immediate environments of the, uh, finance team um, so a request came through from the secretary of the CFO, set up a meeting with me, a catch up. Over, over coffee and, the meeting was set up for a couple of weeks, time. So I was looking forward to that because I could then, perhaps bring to the attention of somebody a little bit higher up in the organization, some of the concerns I was having and see where it went from there. But what happened next, um, was a bit surprising. So a few days before the date scheduled for the meeting, I was informed by the secretary that the meeting had been canceled and no reasons were given. I tried to reschedule the meeting a number of times, but to no avail. Then coming up to the end of the, second month of my three month assignment. The finance director called me into a meeting room, one day and told me that I was being, I was being given

Simon 12:40

One notice.

12:42

He told me, uh, his understanding was that my work was substantially completed and that I was not needed any further. I, of course, said to him that, well, there was still work to be done that I still had to complete, and I I was happy to help out anyway, and in other areas, because there were clearly, short staffed and bottlenecks occurring within the finance department. In backlogs. So I said I'd cleared the decks for me to be available for this assignment for the three months, and I said I, I felt I was doing a good job, uh, even though the financial controller had been, you know, difficult with me at times. I said that I was using my experience to deal effectively with the auditors and I'd made a, a number of tangible improvements and efficiencies in the audit process. Well, he had some petty and spurious comments to make about my work. Uh, this is the, this is the finance director, uh, about my approach, about my, about my skills generally. And he told me that he was not going to change his mind about my leaving. He also told me that I'd made too much of a thing about the over accrual, the 1.3 million over accrual on the investment bank success fee. Well, all this came as a complete shock to me as I've been thinking, well, I was doing a good job and I was getting a good handle on the, uh, understanding the, the financial environment in, in this group. And, how things were working well. And if things were worked out, then there may be an opportunity for me to have a more permanent and added value role, to play in the organization. So anyway, I was working out my week as he wanted me to do. Um, four days later, the financial controller called me into the meeting room, and, uh. Told me that I was to leave that day, that I was not going to be working out the fifth and last day of my notice period, that I'd get paid for that day anyway, there was no mention of anything to me about my time at the group, my work, nothing. Nothing was said. No thank you. No wish me well. The financial controller just said you're leaving today, and that I was to hand back my key fob.

Simon 14:35

So you think there may have been some unethical behaviour going on in the organisation

14:40

The controlled environment was so poor and had so many deficiencies that there was a real risk of, uh, of white collar fraud, uh, either by, uh, an individual, or by collusion amongst a group of individuals.

Simon 14:55

So you were unceremoniously dumped out of the job. Was that the end of the matter.

15:00

So yeah, so I was no longer working for the company, but, two subsequent, events happened that I think, are, important, for me to convey. The first one is that, a week or so later, after my assignment, I met the individual from the recruitment firm, who had placed me, in the assignment, to go through a debrief as to what had happened, and so on and so forth. And, he mentioned to me over a coffee when we met that, a number of things had been mentioned to him by the finance director, including that, my style, uh, as he put it, was not appreciated and that I was too meticulous. Of course, I firmly believe that certain people in the organization became uncomfortable with what I was finding. And were worried that I might become a whistleblower. And that's why I think my meeting with the CFO was canceled someone, or some people did not want me meeting with the CFO. And uh, and I think that's also why I was, uh, unceremoniously told my services, uh, were no longer required. The second subsequent event that I think is noteworthy is that I felt aggrieved and troubled about, what I had seen inside the finance department that I felt. It was incumbent upon me to bring that to the attention of senior management even though I was no longer working for the company. So I, set up a, meeting with the chief operating officer and that person was number two in command only to the, chief executive officer. I met the chief operating officer on a couple of occasions, had gone on well with him. And we met in a hotel not far from the location of the office, uh, where the head office where I'd been working. And over a cup of coffee. I proceeded to give him my preliminary findings. Um, I didn't want to mention names specifically because I thought, you know, I hadn't been given an opportunity to complete, my work but I wanted to give him a steer as to what. Some of the risk factors were, and I, I, you know, I started out by telling him there was a very high incidence of, uh, counting mistakes and errors. And, uh, I wanted to give him some examples of those. I wanted to give him some feedback, about the lack of documented, policies and procedures, that the systems and accounting processes seem to have evolved in a piecemeal fashion. And, basically the checks and balances in the financial systems, were either not working or non-existent. And of course there was this, a complete lack of internal controls that one would normally expect to find in a well run accounting department of a similar medium sized group. I talked him through the accounts payable issues, the journal adjustments that were being made to correct past errors and mis postings. And the lack of timely intervention to correct errors. And I explained how the finance department was spending an inordinate amount of time correcting errors and mistakes when that time could be more productively spent, on proactive, accounting issues. But look, I left him in no doubt that, action needed to be taken now to fully identify, and to correct the major deficiencies and weaknesses in the internal control environment and in the accounting systems. And I explained. To him. And he wasn't an accountant, that as things stand at present, there are real risks that issues could arise, such as the misappropriation of funds or assets, unnecessary expenditure, significant accounting errors. And that given the weaker control environment, there's a real possibility that some irregularities have already occurred in the past few years, and there's a risk that those irregularities, uh, were ongoing. And that steps need to be taken certainly to detect and prevent any irregularities and frauds occurring in the future. And, there I explained, there were serious concerns regarding the accounts payable function. There was a number of weak links, lack of internal controls, lack of segregation of duties, and certain supplier accounts were being handled exclusively by certain individuals without any oversight by the finance department at all. And so I said that this was, uh, particularly worrying and when I had gone to seek answers to certain, uh, queries, from other, from these other places that I was, uh, I I was rebuffed. And of course, uh, you know, a company like that that was operating in, uh, as a high profile niche player in the real estate market, uh, with institutional funding, you know, there was a real risk, I said, of the group suffering reputational damage, with suppliers and service providers. You know, if every dog on the street knows that the group has a lax and inefficient finance department, and payment errors and mistakes are are widespread. What does that sort of say about, the overall company? Look, at the end of the day, the chief operating officer, listened to what I had to say. Was taking it on board, was making some notes, and, I felt that that's, uh, you know, that what I had done, the, the steps I'd taken, uh, whilst sort of being unusual once you left a company, you sort of left. But I, I felt better for having. Met. And I let it be there. That's, where I, I left it and he sent me an email subsequently thanking, me for, for meeting with him and wishing me all the best. I did find out some months later on, checking on LinkedIn that the CFO, that was the individual who had overall. Responsibility for the functioning of the finance, and accounting department. He, was no longer with the organization, so, was now in another employment. So you can read into that. What you will. Um, I, I don't know what happened to the other individuals, within the finance department and, and immediately outside the finance department about whom I had some grave. Concerns.

Simon 20:41

You paid the price for raising your head above the parapit and for delving too deeply into places where some people did not want you to go. What advice would you give to someone, an employee who has real concerns about colleagues in an organisation and what they might be up to, given the reprecussions that he or she might genuinely fear if they were to become a whistleblower.

21:01

What I would say is look, gather as much, documentary information and evidence as you can covertly, observe, investigate, seek allies carefully. 'Cause you never know who's colluding with who. See if there's, anonymous reporting channels, if they're available, to report up the line, your concerns. Consider raising the concerns through the HR department if there is one. Possibly approach, senior management. And, but also consider taking independent legal advice to protect your own position if you feel that that's at risk. So it's a balancing act, but it can be done responsibly. Look, opening a can of worms can be daunting, but it also means you are uncovering truths that need to be addressed. Just approach it with careful planning, support, and a clear purpose, and you'll navigate it effectively.