A recent US bench trial serves as a timely reminder of the importance of fraud detection. Judge Rothstein found the auditors breached the professional duties it owned to their former client, The Colonial BancGroup, Inc (“CBG”) as it failed to design its audit to detect a $2 billion plus fraud perpetrated against Colonial Bank (“Colonial”), a subsidiary making up at least 97% of CBG’s assets. Judge Rothstein described the auditor’s approach to verify the existence of Colonial’s asset as “asking the fox to report on the condition of the hen house”.
Procedures and substantive testings designed in financial statement audits are relatively standardized and often, auditors only pay attention to material misstatements, where the definition of material depends on a materiality level set by audit planner. In other words, irregularities below such “material” levels are likely to be neglected. It is therefore possible for personnel in management levels with sufficient work experience or knowledge of audit to deliberately mislead auditors by falsifying documents or creating fake transactions in order to conceal their fraud.
How can we assist
We are experienced in funds tracing and identifying doubtful transactions from companies’ books and records, and have a substantial track record in conducting corporate investigation in the Asia Pacific Region.
As every forensic job is unique, it is essential for us to design and perform custom procedures and workpapers for each of the jobs with the aim of detecting financial frauds and investigating irregular and suspicious transactions.
Fact-finding is one of the most important components in forensic accounting field as our conclusion and findings are directly influenced by evidence found. We have various approaches to collect appropriate information such as making use of computer forensic techniques, conducting face-to-face interviews and preparing questionnaires to key personnel. We compare information and documents gathered from different sources in order to verify its accuracy and to identify discrepancies and inconsistencies. There are no constraints in respect of materiality in forensic accounting. When it is necessary, we analyse every transaction and examine every account thoroughly.
In one of our appointments, we were engaged by a director of a Hong Kong based trading company to conduct a review of the company’s accounting records because the director alleged its ex-CFO that he abused his authority in assessing the company’s bank accounts and the director’s personal bank account to misappropriate a substantial amount of money from the company. He was also suspected to have obtained confidential information which he was not authorised to obtain.
In this engagement, our forensic accounting team:
- reviewed all the available banking and accounting records to identify the source of funds received and the destination of funds withdrawn between the parties;
- conducted a computer forensic analysis on laptop computer used by the ex-CEO to collate evidence;
- identified misappropriation perpetrated by another senior management of the company. located suspicious funds transferred to the senior’s account from the company’s bank account which appear to be out of the course of normal business operations during our investigation in the transactions between the ex-CFO and the group; and
- prepared a report on the findings and the owners of the group used this report for reporting the case to the Hong Kong Police and also use it as the major supporting for a civil claim against their ex-CFO.