Asset Fraud: An Interactive Case Study towards Identifying Fraudulent Lease Transactions

Transcription

1 Asset Fraud: An Interactive Case Study towards Identifying Fraudulent Lease Transactions

2 Session Outline Sample Case Case Workbook Results of Case Analysis Asset Fraud Prevention Questions & Answers

3 Case Studies Examine each of the five case studies in the provided Case Study book with the objective of identifying whether or not a transaction is fraudulent based upon the information provided.

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5 Results- Case 1: Amazing Space Red Flags Vendor and Customer Addresses Pro-Forma Invoice Warranty, Parts, Labor Actual Proof The paint color on the machines was incorrect for the year of manufacture. Serial Number Tag was held on with double sided adhesive tape.

6 Results- Case 2: United Plastic Red Flags Appraiser is not an expert in plastic resin compounding machinery. Actual Proof No tangible evidence. Equipment valuation is subjective. Machinery not capable of producing enough finished goods to reach companies revenue in financial statements.

7 Results- Case 3: Global Outsourced Red Flags No line item pricing detail. All materials generated by lessee. Difficult to assign value to hardware. Yield and end of term upside are very favorable given the credit strength. Actual Proof N/A

8 Results- Case 4: Multi-Bag Red Flags Equipment specific expertise required. Lack of Serial Number(s) ) on invoice. Manufacturer is unknown entity in primary and secondary market. Actual Proof N/A

9 Results- Case 5: Rock Way Red Flags Purchase price of equipment. Vendor. Imprecise equipment detail. Actual Proof N/A

10 Fraud [n] something intended to deceive; deliberate trickery intended to gain an advantage [FBI] the intentional perversion of the truth for the purpose of inducing another person, or other entity, in reliance upon it to part with some thing of value or to surrender a legal right.

11 Recent Well Known Frauds Gitto Global: $40MM Securing Intentional Over-Advances Cybernet: : $65MM Financing Non-Existent Assets Norvergence: : $230MM Securing Intentional Over-Advances Enron: $BB Financing Non-Existent Assets

12 Basis of All Fraudulent Financings Financial Statement Misrepresentation Is the Building Block of all Financial Fraud Overstatement of Assets Receivables, Inventory, Capital Equipment Understatement of Liabilities Pension Obligations, Off-Balance Sheet Obligations

13 COSO Study The study found that typical financial reporting fraud schemes involved the overstatement of revenues and assets: In more than half the cases, revenues were recorded prematurely or fictitiously About half of the fraud involved overstating assets by understating allowances for receivables, overstating the value of tangible assets, and/or recording non-existent assets In the past decade, most fraud in financial reporting among public companies was committed by smaller corporations, with well below $100 million in assets. Top senior executives were frequently involved. In 83% of the cases, the CEO, the CFO or both were named as being associated with the financial statement fraud.

14 COSO Study (continued) The boards of directors of these companies were dominated by insiders and directors with significant equity ownership. Audit firms of all sizes were associated with companies committing financial statement fraud. Cumulative amounts of frauds were relatively large in light of the relatively small sizes of the companies involved. The average misstatement or misappropriation of assets was $25 million. Some companies committing fraud were experiencing net losses or were in close to break even positions in periods before the fraud. Pressures of financial strain or distress may have provided incentives for fraud for some of companies

15 Fraud Prevention Proving Fraud is Virtually Impossible Usually there is a Legitimate Business 100% Prevention is Cost Ineffective Frauds Can Be Perfect ergo ergo Undetectable For a while Systems Asset Management Based Organizational Operational Risk Role of Intuition

16 Fraud Prevention (continued) Tell Tale Signs Errors and Omissions Unknown/Unverifiable Vendors Too Good To Be True Change of Name Complex Corporate Structure Address of Vendor/Customer Proforma Documents Lack of Line Item Detail/Pricing

17 Fraud Prevention (continued) Higher Probability Transactions Method of Origination Brokers Used Equipment Appraisal Included with Submission Assets that are not easily understood Expertise of Appraiser does not match Assets Funding/Advance in excess of Market Value

18 Exiting a Fraudulent Transaction It s s generally too late Inspect immediately! Spend judiciously on recovery, litigation, etc Work closely with legal counsel.