Question

In this module, we focus on the concept of conversion, which is the actual monetizing of the fraudulent activity of the perpetrator. In this discussion, you will outline how you would implement one of the tools that is used to identify conversion.

Your boss has presented you with a fraud case which has occurred at a manufacturing plant of a major auto supplier. In this case, there has been circumstantial evidence collected, which indicates that the plant manager has been incorrectly booking revenues and costs to increase the performance level of the plant and thus, the bonus payout for himself and the remainder of the plant leadership team.

You have been asked to employ the net worth method to provide evidence to support these claims. To complete this exercise, you have been provided the financial statements of the facility for the past 5 years along with access to base activity information (invoices, etc.) to support the financial statements.

How would you go about this investigation and why?

What key information would you request to support the analysis and why?

What specific steps would you take to identify the fraud and why? Integrate the specific internet search tips in your answer.

Answer 1

Net worth Method: It is used mostly by Government prosecutors in criminal tax cases. It focusses at the difference between a person’s net worth on any two given dates.Requirements of Net worth method

1. Establishing a definite opening net worth.
2. Negate plausible explanations by the defendant inconsistent with guilt.
3. Establish that net worth increases are attributable to unreported taxable income

Incorrect booking of revenue & expenses: Firstly income and expense accounting policies needs to be checked to be in conformity with the accounting standards and then one needs to deep dive into analytics. All Revenue receipts needs to be checked alongwith supporting documents. Genuineness of the customers needs to be checked. The invoices can be fake, so one needs to check if such party actually exists. If yes, who are the owners. Internet can be a great tool to check this type of activities. Similar exercise needs to be done for expenses as well.

Analytics plays a great tool in identifying frauds. Revenue can be analysed in terms of quantity and rate. One can compare the quantity sold to each customer and year wise and at the same time their realisation in the bank account. Is there any party to whom goods have been sold inspite of outstanding payments beyond the allowed credit period. One needs to check rates on a quarterly basis whether the same good has been sold to a party at significantly low rates.

Since it is a manufacturing concern one needs to check the genuiness of the transaction basically all the expenses, they need to be consistent quarter on quarter, year on year, party to party, location to location. If not there needs to be reasonable justification for the same. For Eg: Power cost in absence of rate hike or abnormal production needs to be consistent across various quarters. If there is significant difference one needs to deep dive. In this manner one needs to be scrutinise each and every item of Income statement and Balance sheet.