Fraud Examination Report

The examination has been prompted by a series of events including the call for notice received by the co-owner and manager, Jack Walker, from the Bardigo First Bank along with an anonymous tip-off received in the mail.

5. Approach

Fraud Examination Team Members

CLIENT NAME, Chief Financial Crime Investigator, Chase Klim an agent was appointed as a recently graduated accountant, was deliberately brought in to shadow Daisy Sefton. Jasper Binchy was planted in place of Pham Anh (Andy) as the warehouse manager. Further, each fraud investigators were accompanied by an external auditor to examine the accounts with the possibility of a fraud. Finally, the investigative team included Angus, an IT Forensic Investigator.

Procedures

As a part of the examination, the Financial Crime Investigation team undertook the following actions:

• Performed covert investigation about the operations at the CarpetCircuit Décor, and as a part of the covert operations, a number of undercover agents were placed in the firm.
• The team gained access to the locked filing cabinet of Daisy Sefton and got to know about the financial embezzlement that was being done under the name of the Carver Marbles, which was being used as a different supplier being used by Daisy Sefton and Pham Anh (Andy).
• The team gathered the receipts and transcripts of the invoices of the financial transactions that were made to and from CarpetCircuit Décor over the past few months.
• Gathered, accessed and analysed the metadata recovered from Daisy Sefton’s workplace computer and the flash drives in her desk.
• Conducted close surveillance of the warehouse and the inventory and gathered evidence about the mix- up that was being carried out wherein Pham Anh (Andy) switched the prime quality Caverra marble tiles from Italy with the “Carverra” marble tiles that were brought from Vietnam.
• Conducted a thorough search of Pham Anh (Andy)’s personal property to find a van with the name Marble Impressions stamped on its surface. Apart from Pham Anh’s personal property, the team also undertook a thorough investigation of his office premises and found certain key documents like the evidence of his regular visits to the Ho Chi Minh City in Vietnam.

Individuals Interviewed

During the course of the investigation, the co-owner and manager of CarpetCircuit Décor was interviewed for his formal statement about the internal practices in his firm and the provisions and bylaws in his company pertaining to the fraudulent activities conducted by the employees. Further, Daisy Sefton, the party found guilty, was interviewed by the Chief Investigator (CI). The interview comprised of the timeline and the motive of the fraud she committed.

6. Findings

On Monday, 31 July 2017, Jack Walker after receiving two documents which alerted him to the possibility of an organizational fraud being carried within his business, which made him recruit the services of Rest-Assured Security which is based in Chatswood, NSW. In the meeting, it was decided that internal investigation would be carried out within the organization especially of the Accounts and the Warehouse of the business, retracing the activities of the previous two years. The investigation was to be carried out under the guise of another company Heavenly Clouds Interiors, with which CarpetCircuit Décor is supposed to be entering into a business deal.

After the desired announcements were made in the company regarding the potential new employees from Heavenly Clouds Interiors, Jack Walker reviewed the personnel files and appointed Carol, an existing employee, and Chase Klim, a member of the investigative team and undercover as a freshly graduated trainee accountant as mentees to Daisy Sefton. Further, upon a thorough examination of the leave rosters, it was found that Daisy Sefton had not taken any leave over the past eight years, following which, he advised her to take 4 weeks of leave with immediate effect.

This was followed by the appointment of undercover investigator Jasper Binchy as a full-time replacement for Daniel, a trusted employee who resigned recently following the high handed mannerisms of Andy, the warehouse manager.

Over the next few weeks, the accounts and the warehouse divisions of the company were scrutinized by the undercover investigating officers posted within these offices. Chase Klim, the agent in the accounts office picked up several interesting pieces of information. It was found that Daisy was being increasingly protective over the general ledger book of the business and refused access to her new mentees, Chase and Carol. Further, it was found that she refrained from assigned key roles and responsibilities pertaining to the sales and receivables accounts to both of them, overriding Jack’s orders to do so.  Further, Chase also picked up on the office grapevine network, through Daisy’s friend Mary, the information rotating that Mary was selling most of her home furniture on an online site “Buy, Swap and Sell”. On the Other hand, Jasper Binchy, the investigating agent planted in the warehouse as a replacement for Andy (another prime suspect for business fraud), went through Andy’s personal belongings and found a photocopy of an airline booking receipt which showed that Andy was due to travel to Ho Chi Minh City via Vietnamese Airlines on the same day that he was supposedly travelling to Italy in his garbage bin. However, Andy’s computer records could not be accessed.

On Wednesday, 2 August 2017, Chase Klim, the investigative officer planted in the accounting officer arrived earlier in the office, finding the lights on. It was discovered that Daisy was having an altercation with some unidentified person on Skype, and sounded fairly upset. The gist of the conversation can be summarised in a manner that indicated that someone was desiring money from her with respect to the health of their mother and they had plans to get married. When Chase entered the office, Daisy shut down her computer, made a mobile call and left the premises. At around 8 on the same day, Chase’s co- mentee, Carol came in with Daisy’s purse stating that she spotted her in a coffee shop with her sister, and made a hasty exit after spotting Carol, leaving her purse behind. As per Carol’s account as an eyewitness, Daisy’s sister Rose was driving a fairly expensive car, a new black Maserati, with the name Andy written on the license plate.

Jack, being the responsible employer, took it upon himself to personally deliver Daisy’s purse to her house in Pennant Hills. His visit led to a series of new revelations. There was a sign of a “Garage Sale this Saturday” on Daisy’s front lawn and upon further inquiry, Jack found out that post her father’s demise six years ago, Daisy spent most of her time at her Sister’s home. This particular piece of information was a rather interesting, citing the fact that on Wednesday, July 26, 2017, Daisy has demanded an increase in pay so that her current annual salary of $97,000  be increased to $107,000 per annum due to the increased cost of caring for her elderly father at home. Perturbed by the series of events, Jack went to Rose and Andy’s house, located at 10 Sandry Crescent, Beecroft. It was found that their home was a luxurious two-story mansion surrounded by fountains, a tennis court, and a swimming pool. The luxurious house is rather suspicious considering the fact that Jack is merely a Warehouse manager with an annual salary of $110,000 and his spouse Rose is a stay at home mother to their three kids. On further inspection, a Maserati with the number plate ‘Andy’ and a large van bearing the name ‘Marble Impressions’ was found in the garage. The lifestyle followed by Andy and Rose provided a major indication of their involvement in the foul play at CarpetCircuit Décor.

Undercover agent Jasper Binchy in his investigation of the warehouse found several discrepancies in the managerial procedures being followed by Andy.

• There were no inwards or despatch of Caverra marble, the prime product of CarpetCircuit Décor.
• It was found that since Andy’s appointment six months ago, the warehouse staff are now completely segregated from handling the marble in the warehouse.
• Andy used to organize the marble to be delivered at unusual times of the day, usually on the weekends or out of office hours and he is totally responsible for the Caverra marble goods and dispatch
• Further, it was found that there was poor segregation of duties between buying, warehousing, and goods inward, with Andy maintaining control over all functions of the warehouse.

Revelations from the caged section of the warehouse

On Thursday, 3 August 2017, Jasper Binchy found 500 units (boxes) coded and marked ‘Caverra marble’, packed together in a locked caged rear section of the warehouse. Upon gaining Jack’s permission to bring in a Locksmith and getting the cage opened, it was found that out of a total of 500 boxes, only 25 were filled with marble and the rest were found to be empty.

Revelations from Daisy’s filing cabinet

The opening of Daisy’s filing cabinet led to certain interesting indication towards the fraud being conducted in CarpetCircuit Décor.

1. Top Drawer

There was a large pack of ‘Carverra Marble’ letterheads and a file marked restricted. A search of the file produced 30 completed invoices on the ‘Carverra Marble’ letterhead to CarpetCircuit Decor for amounts ranging from $25,000 to $100,000 for the marble tiles. The invoices were found to have been generated by a word processor, were numbered sequentially and carried a registered address as P.O. Box 145, Beecroft. The invoices were marked to be paid to the Carverra Marble account, Eastpac Bank Account No. 203465. This was an interesting development in the sense that the false company being used by Daisy for fraud carried a name similar to the firm’s genuine supplier. Further, as per the claims made by the owner, Jack Walker, of Carverra Marble was unheard off and his company, Carpetcircuit Decor had never used Carverra Marble as a supplier. Apart from the invoices to Carverra Marbles, the restricted folder also contained five invoices to ‘Carverra Marble’ from Hornsby Storage Units, 22 Caraway Avenue, Hornsby, marked ‘PAID’, along with the receipts depicting monthly payments of $420 for the months May-September, 2017 for storage unit No 68. The receipts were drawn for ‘Carverra Marble’

1. Second Drawer

A close scrutiny of the second drawer revealed 42 blank CarpetCircuit Décor cheques in a chequebook along with CarpetCircuit Décor NCR receipt books. The receipt books were identified by Jack, however, he claimed that the amounts inked on the receipt books were not aligned with the printed spaces on it, indicating that they were tampered with.

1. Bottom Drawer

The bottom drawer revealed a key with a tag marked ‘Hornsby Storage Unit 68’.along with a large number of Eastpac bank statements in the name of ‘Marble Impressions’ along with an Eastpac ATM Visa card receipt notice in the name of Daisy Sefton. The address given was the same postal address as Carverra Marble and the bank statements were addressed to the same postal address of Carverra Marble. The account No. 203465 matched the account details given on the Carverra Marble invoice found in the top drawer. A thorough assessment of these statements and documents revealed that CarpetCircuit Decor had been making a considerable number of payments to Marble Impressions.

Jack Walker confirmed that the amounts of $25,000 to $100,000 for marble tiles as set out on the ‘Carverra Marble’ letterhead matched the usual cost price for the units of the authorized Caverra marble tiles. Further, a cross-examination of Daisy Sefton’s Eastpac ATM Visa card address showed a match with the ‘Marble Impressions’, presenting evidence that she was embroiled in a fake vendor scheme. An examination of the information gathered from the invoices about ‘Carverra Marble’, revealed that the company was spurious. An examination of the Australian Business Number (ABN) revealed that the ABN number given on the Carverra Marble letterhead, too was false. The entire hard drive of Daisy’s computer was then duplicated. And the original drive was then moved to secure storage.

Andy’s computer was then under scrutiny, which was found to be his personal property. Upon opening his locked drawer, a number of personal papers were recovered including a photocopy of an airline return e-ticket implying that Andy was booked to travel from Ho Chi Minh City on Vietnamese Airlines VA657, which was arriving at Sydney Airport at 4.00pm on Sunday. Further investigations were halted on account of the flash drives and computer being Andy’s personal property which could not be accessed without his approval or a court order. Another hurdle was found in the absence of evidence and witnesses pertaining to the involvement of Daisy Sefton, Andy and Marble Impressions.

Jack Walker received an email from the Italian manufacturers of ‘Caverra’ marble on Saturday, August 2017, stating that their contract expired with CarpetCircuit in June following their receipt of a cancellation letter signed, which turned out to be an unauthorized email sent from his office.

Upon Andy’s arrival, the units in the caged section of the warehouse increased from 500 to 900, fully packed with marble. The CCTV footage was found to have been removed for the last 24 hours and a check of the access code monitor indicated Andy’s access code was entered at 8 pm on the previous evening and an exit occurred at 7.15am.

A further assessment of bank statements for Account No 65742 provided by the Bardigo First Bank. It was found that the recorded payments made to Carverra Marble had 10% added to each payment. Further, six unauthorized payments of $420 were made on the first of each month between May and October to State Bank Account No 4873968 to Hornsby Storage Units. Also, a line of credit account no. 342516 showed regular withdrawals of $15,000 each month with $2,000 as cash and $13,000 electronic transfers to Eastpac Bank Account No. 203465. There are three areas of asset diversion that have been identified in the above situation, purchasing/supplier fraud, sales fraud and billing fraud.

7. Recommendations

The analysis of the state of affairs at the CarpetCircuit Décor reveals a high degree of dependency of the co-owner Jack Walker on his employees, and his minimal involvement in the business operations. While delegation of decision making power is advantageous for a business, there must be a certain degree control exercised by the business head. As a part of the recommendations, it is advisable that Mr. Walker proceeds with a little caution in terms of the trust he places in his employees and ensuring an element of internal control. Further, a centralised inventory system must be incorporated in the business restoring some form of control in the organization. These actions, cumulatively would cover the existing shortfalls in the company and present scope for improved performance in the future.

References

Carcello, J. V. and Nagy, A. L. (2004) ‘Audit firm tenure and fraudulent financial reporting’, Auditing: A Journal of Practice & Theory, 23(2), pp. 55–69.

Chariri, A. (2007) ‘The Relevance of Forensic Accounting in Detecting Financial Frauds’, Jurnal Organisasi dan Manajemen, 3(2), pp. 81–88. Available at: http://eprints.undip.ac.id/581/1/Relevance_of_Forensic_Accounting_in_Detecting_FInanciual_Fraud.pdf.