Presentation to. Forensic Investigations of Financial Statement Fraud: PBS&J A Case Study September 26, Mitchell E.

Transcription

1 Presentation to Forensic Investigations of Financial Statement Fraud: PBS&J A Case Study September 26, 2008 Bill Pruitt Director, PBSJ Mitchell E. Herr, Partner Holland & Knight LLP Copyright 2008 Bill Pruitt and Mitchell E. Herr All Rights Reserved

2 About PBS&J Founded 1960 in Miami, Florida Multi-disciplined 4,000 employees; 75 offices Employee owned; SEC registered A history of success 2

3 Employee Growth ( )

4 Path to Discovery 2000: SEC registrant 2002: Sarbanes-Oxley 2003: Audit Committee formed Three outside members 2004: Internal Auditor hired 4

5 Audit Committee Function Hire independent auditors Review financial statements Determine executive compensation Monitor internal controls and disclosure Internal Audits 5

6 Path to Discovery February 2005: Discrepancy found in 10Q Immediately contacted Audit Committee Challenged Corporate Finance Board authorized Audit Committee investigation Hired attorneys, forensic auditors Discovered embezzlement; confronted CFO 6

7 A Breach of Trust A fraud that began 13 years prior Collusion by trusted employees in corporate finance and treasury: Chief Financial Officer Manager of Business Systems Accounting Manager 7

8 What They Did Secret accounts Cash accounts Medical reserves Income taxes Changing methods to avoid detection Altogether, $36 million was stolen 8

9 By Early 2006 Were wrapping up the investigation Had a finalized overhead rate for engineering company Began overhead audit of PBS&J Construction Services 9

10 The Forensic Investigation From CPA s perspective 10

11 An Independent, Thorough Investigation Audit Committee authority for thorough investigation H&K retained: CPA firm to identify thefts and adjusting entries CPA firm to handle electronic data issues CPA firm with expertise in gov t contracting A private investigative firm 11

12 An Independent Thorough Investigation Accountants had to: Understand they reported to H&K Work as one harmonious team 12

13 Self-Reporting and Cooperation Self-reported to: Local AUSA in Miami DOJ in Washington SEC s Enforcement Division in Miami AGs offices in multiple states Gov t customers in several states 13

14 Self-Reporting and Cooperation Accountants had to: Carefully document investigative steps Realize all communications were subject to scrutiny Make interim progress reports to prosecutors 14

15 A Large Investigation Under Time Pressure Investigation spanned 13 years and more than 15 million entries Reviewed nearly 13 million pages Reviewed electronic general ledger and supporting documents Reviewed 1.5 million messages Analyzed 76 hard drives and reviewed intact and deleted files Interviewed 80 employees, some more than once Interviewed 31 non-employees 15

16 A Large Investigation Under Time Pressure Accounting professionals: Under time pressure PBS&J barred from new gov t work Had to use work product from other firms Participated in critical witness interviews 16

17 Three Phases of Investigation 1. Who embezzled? Additional controls? 2. Amount embezzled? How was it concealed? Impact on financials? Other employees at fault? Overhead adjustments responsible persons? 3. Asset recovery! 17

18 Embezzlement Methods Funds embezzled in various ways: Manual duplicates of uncashed checks PBS&J checks deposited to personal account PBS&J funds used to pay credit cards Fraudulent checks not entered in system Perpetrators destroyed fraudulent checks Compared payees on cancelled checks to system Had to request cancelled checks from banks 18

19 Embezzlement Methods Perpetrators circumvented Positive Pay: Secretly failed to close old account without Positive Pay Diverted funds from account without Positive Pay Secret accounts: thefts looked like inter-co transfers Only one fraudulent wire transfer 19

20 Concealment Methods Hundreds of concealing entries Difficult to distinguish ordinary entries 7 concealment methods: 1. Recorded different payee than on check 2. Showed legitimate purpose on fraudulent check 3. Altered balances in general ledger in next fiscal year 4. Altered journal entries after posting 5. Recorded fraudulent journal entries to reduce cash 6. Transferred cash between accounts, but not record receipt 7. Prepared fraudulent bank reconciliations 20

21 Convincing all Interested Constituencies Mission: convince that restatements were correct Two national accounting firms current and prior auditors DOJ and state AG offices SEC Federal and state gov t clients 21

22 Convincing all Interested Constituencies PBS&J risked loss of gov t contracts Laid out investigative plan Solicited input Defended our approaches Result: all constituencies concluded: Investigation was thorough Restatements were accurate 22

23 Identifying Remedial Measures CPAs assisted in identifying remedial measures PBS&J adoption of remedial measures was key to success 23

24 So, You Want to be a Forensic Accountant? You ll like being a forensic accountant if you enjoy: Taking direction from lawyers Teaming with your competitors Working under time and emotional pressure Prying information out of crooks Explaining yourself to government prosecutors Defending your actions to skeptical fellow forensic accountants Saving a good company with honest, hard-working employees 24

25 Where We Are Today Restated financials Settled with DOJ SEC did not sue PBS&J Wrapping up client refunds Doing business with gov t clients Back to business better and stronger! Sharing our story 25

26 What about the employees who stole from our company? 26

27 Sentences Scott DeLoach ($17 million): 97 months Maria Garcia: ($10 million): 63 months (under appeal) Rose Licata: ($9 million): 63 months 27

28 A Stronger Company Today CFO with SEC/Sarbox experience A new Finance Department Independent Board members A robust Ethics and Compliance Program Code of Conduct Employee Training Hotline Melissa Eubanks Award 28

29 A Stronger Company Today Strengthened Internal Audit Program Comprehensive Business Risk Assessment Program Centralized finance/contracts functions New cost accounting system being implemented 29

30 Rules to Live By Find your mistakes, admit to them, then fix them immediately! Transparency is a must! You don t know what you don t know! Reagan had it right: Trust, but verify Create a dedicated crisis management strategy 30

31 Rules to Live By Communicate, communicate, communicate No news means bad news during a crisis Anticipation kills! And most importantly 31

32 Do the right thing even when no one is looking. 32