Category Archives: Forensic Accounting

Brothers Who Owned Defense Firm Get Prison in $6M Fraud Case

Posted by Abdullah Aljammaz.

Two brothers have formerly owned a Pennsylvania defense contractor in Pittsburgh was sentenced to  prison after their involvement in a $6 million fraud was revealed. These two brothers planned to overcharge the U.S. Defense Department for Humvee window kits.

The two brothers paid the $6 Million back to the U.S government and another $6 Million to settle a lawsuit that the American government filed against the Buckners. Not just that, the brothers paid around one million dollars in interest and income tax losses.

According to Judge Arthur Schwab, they have different sentences. The older brother Thomas Buckner received the more laborious penalty, because he was more active in everyday business and more active than the other brother John, especially in 2007 after Buckner retired from the company’s management. The brothers owned half the company where the crimes happened. At the current time, the company was sold in February to new investors who had nothing to do with Buckner’s fraud.

Thomas Buckner, 68 years old was sentenced to two years and a half prison and a fine that he has to pay of half a million ($500,000). The other brother, John Buckner, 66 years old was sentenced to two years in prison and fined $300,000.

Assistant U.S. Attorney Nelson Cohen and defense attorneys agreed that it is possible to sentence the brothers below the forty-one to fifty-one months in prison. That sentence will be given to them due to their cooperation, and charitable works and their record of civic. On the other hand, Schwab rejected arguments by Alexander Lindsay Jr. Thomas Buckner’s attorney, who wanted probation.

Based on the article above, here are some quotes from the original article:

“A non-prison sentence is a bridge far too far in considering the defendant’s conduct,” Schwab said. “You don’t want to stand in front of a judge with a pile of money in the bank and the victim not paid in full,” Cohen told the judge. “Paying back the money is just the cost of doing business.”

Abdullah is a graduate student at the Feliciano School of Business, Montclair State University.

Source:

http://www.foxbusiness.com/markets/2017/10/10/brothers-who-owned-defense-firm-sentenced-in-fraud-scheme.html

 

 

Health Benefits Fraud

Posted by Barkimba Diallo.

In the last few months, a federal investigation has helped yield numbers of guilty pleas in South Jersey. A firefighter in Atlantic City, a Margate doctor, two local pharmaceutical representatives and six others admitted fraud of more than $25 million.  The number of convictions is expected to go up due to court documents showing that more than $50 million was paid to one compounding pharmacy. According to the article, this is a minor fraud case compare to the trial of Senator Bob Menendez where a Florida eye doctor Salomon Melgen abetted by Senate Majority Leader Harry Reid was convicted of Medicare fraud for more than $100 million in five years. Sen. Bob Menendez and Harry Reid allegedly contacted former Health and Human Services Secretary Kathleen Sebelius for advice on the trial and She replies in the negative.

Marc Pfeiffe, of the Bloustein Local Government Research Center at Rutgers University, said that “New Jersey’s $2.5 billion State Health Benefits Plan’s generosity presents opportunities for fraud.” He also added that the $25 million fraud represents just a smidge of what really goes on. Public servants involved in the crime do not fear the consequences of their actions as they are aware that the malaise is deep rooted.

Marc Pfeiffer, of the Bloustein Local Government Research Center at Rutgers University, said that fraud is the big reason why we don’t have fair competition among health providers because the choice of beneficiaries is done based on who gives the most kickbacks. He concluded that we should imbibe the best practices in the private sector if we want to root out corruption.

Barkimba is a graduate student at the Felicano School of Business, Montclair State University.

Source:

http://www.pressofatlanticcity.com/news/breaking/our-view-corruption-cases-show-health-benefits-fraud-out-of/article_04e17d37-7eec-564a-b7c2-623e260d7a00.htmlLinks to an external site.

Wilmington Trust and the Prosecution Strike a Deal

Posted by Shaiban Almarri.

Wilmington Trust Corp. has agreed to pay $60 million to the government after facing charges relating to the bailout program of the federal bank. This agreement incorporates a civil forfeiture of $16 million and $44 million that the bank had paid to the Securities and Exchange Commission in an earlier but similar lawsuit. The court postponed the anticipated trial until March after the acting U.S. Attorney David Weiss said his office had agreed to dismiss the case against the bank.

Mr. Weiss said the bank had accepted the responsibility of its actions despite having refused to admit liability. Meanwhile, the bank’s parent company M&T Bank asserted that it was in the bank’s best interest to resolve the matter.

Wilmington Trust had been accused of dishonesty regarding its “…deteriorating commercial real estate portfolio from investors, bank regulators, and the Securities and Exchange Commission.” Consequently, some members of its former top management will be answering charges of conspiracy and fraud. Meanwhile, a number of the bank’s employees have already pleaded guilty while a section of them have even been sentenced.

A government affidavit referenced in the court revealed how a top official fraudulently got money from Wilmington Trust to be used for personal activities. Furthermore, the bank failed to explain why it used to “waive” mature loans that had been specified as current for interest, a practice that was later found to have hidden around $333 from the previous due loans.

Shaiban is an MS Accounting student at Feliciano School of Business, Montclair State University, Class of 2017.

Work Cited

“Wilmington Trust Reaches $60M Settlement with Prosecutors.” CNBC. Np. 2017. Web. 17 Oct. 2017.

https://www.cnbc.com/2017/10/10/the-associated-press-wilmington-trust-reaches-60m-settlement-with-prosecutors.html

Forensic Accountants Assist in Fraud Prevention

Posted by Abdullah Aldahmash.

As the article begins, “to survive in this age of austerity and fraud,” there is a requirement for a more quick-witted and more refined arrangement of accountants, prepared to offer experiences and answers for all methods of business. This incorporates not just representing legitimate direct of business and reinforcing inbuilt process controls, yet in addition techniques for the discovery and avoidance of extortion and unfortunate behavior. In the beginning of the financial downturn, the accounting profession had experienced radical changes because of accounting catastrophes, e.g. Enron and WorldCom. Forensic accounting is an integration of accounting, auditing, and investigative skills. There is interest for it as general society is compelled to manage financial downfalls, and an ascent in desk violations and misquotation of money related data. Financial misstatement is one of the highest constituents of fraud today. It is the “deliberate misrepresentation of the financial condition of an enterprise, accomplished through purposeful misstatement or oversight of amounts or disclosures in the financial statements to fool users.”

According to the article, corruption, asset misappropriation, and fraudulent financial statements are the main reasons for the financial misstatement. Corruption includes fraudulent situations in the nature of conflict of interest, bribery, illegal gratuities and “economic extortion.” Asset misappropriation includes “skimming and larceny of cash, fraudulent billing, payroll and reimbursements, and misuse and larceny of assets.” Finally, fraudulent financial statements includes inappropriate representation of liabilities and expenses, inappropriate disclosures in financial statements, inappropriate valuation of assets and inventory, inappropriate realisation of revenue, and “timing differences.”

To prevent fraud in the future, a forensic accountant should keep in mind many key rules that absolutely will help them to be more efficient regarding handling the fraud. These keys are:

Improper composition of the Board of Directors or Audit Committee; improper oversight or other neglectful behavior by the Board of Directors or audit committee; weak or non-existent internal controls or process controls, including an ineffective internal audit function and improper conduct of external audits; unusual  or extensively complex transactions; financial  statements requiring significant subjective judgment by the management; rapid growth or unusual profitability, especially when compared with industry peers; recurring negative cash flows or inability to generate positive cash flows; significantly high transactions with related entities not in the ordinary course of business; inappropriate disclosure of related-party transactions; uncommon changes in the relationship between fixed assets and depreciation; uncommon increase in gross margin or profitability compared with industry peers; immoral standards: recurring  attempts by the management to justify marginal or inappropriate accounting on the basis of materiality; sophisticated organisation structure involving uncommon legal entities or managerial lines of authority; central administration; significant operations in places considered tax havens, with no clear business justification.

Abdullah is a graduate accounting student at the Feliciano School of Business, Montclair State University, Class of 2017.

References:

Anand, D. Elementary, my dear retail investor. The Hindu BussinessLine. Retrieved from: –

http://www.thehindubusinessline.com/news/education/elementary-my-dear-retail-investor/article4960231.ece

 

Nick’s Roast Beef Sandwich Shop Scandal

Posted by Chelsea Macchione.

Earlier this year in Beverly Massachusetts, Nick’s Roast Beef, a family owned sandwich shop, was found guilty to tax evasion during the years of operation, 2009 to 2013. The sandwich shop, at this time, was an all-cash business and would understate their income by splitting up excess cash between the two owners, Nichols Kaudanis and Nicholas Markos. By understating their income, Nicks Roast Beef got away with paying taxes on not even half of their actual income during those 5 years. The company found a way to manipulate their receipts so that it reflected only the cash that had been reported on and not any of the other cash that was earned and distributed to the partners. Between the years of 2009 to 2013 the investigating auditors claim the company got away with not paying around $1,000,000 dollars in taxes.

 

Tax evasion can happen within any type of business. If there is a way to manipulate income, there is a company out there is doing it to try to get away with paying fewer taxes for one reason or another. In this example, it was very easy for the business to get away with type of fraud because at the time they were strictly cash based. Cash is hard to audit and keep track of within a business, like the sandwich shop, because the only form of evidence there is are receipts from cash register transactions or customers. It is not difficult in a situation like this to either not record cash collected or generate fake receipts to report. Nicks Roast Beef took full advantage of this type of fraud and then suffered the consequences of jail time served by all of the owners and parties involved within the sandwich shop.

In my opinion, this type of fraud is probably existent within many different types of businesses due to similar circumstances in this case. Cash plays a huge factor with understating income because, like stated before, its very hard to keep track of it. Any type of business that can get away with cash transactions for goods or services that are usually paid for on account, can easily get away with not reporting it with no questions asked. Nicks Roast Beef was also a family operated business, which is sometimes what fuels fraud to occur within a business, having trust in everyone involved to not report the illegal activity. In circumstances like this, I believe it will always be a challenge as an auditor to know if the business is stating their cash income correctly. More evidence and questioning should be exercised in cases where family owned businesses are in charge of reporting their income and more of a consistent monitoring of the business finances should be put into place.

Chelsea is a MS accounting student at the Feliciano School of Business, Montclair State University. 

Due Diligence Is the Best Defense

Posted by Monika Lipowska-Flis.

In article “PWC Lawsuit Tests Whether Auditors Must Guarantee Against Fraud,” the trial will determine if the one of the big four companies will survive or vanish from the market. PricewaterhouseCoopers (PWC) is being sued by Federal Deposit Insurance Corp. for 2.5 billion in losses suffered from collapse of Colonial Bank. According to the lawsuit, the fraud was perpetrated by the former chairman of Taylor Bean & Whitaker, the biggest mortgage customer of Colonial bank, and also by top executives from the bank. As we read in the article, the fraud was undetected by PWC, internal auditors, state and federal banking regulators and also by a forensic audit accounting company.

PWC defense is using pari delicto doctrine. It is “a descriptive phrase that indicates that parties involved in an action are equally culpable for a wrong. When the parties to a legal controversy are in pari delicto, neither can obtain affirmative relief from the court, since both are at equal fault or of equal guilt. They will remain in the same situation they were in prior to the commencement of the action.” PCW is also arguing Alabama’s “contributory negligence,” stating that Federal Deposit Insurance Corp. was also negligent in discovering the fraud at Colonial Bank. “The failure of the bank had nothing to do with auditing or accounting,” according to legal counsel representing PCW. “The bank had its own failed strategies that over time caused it to suffer and fall apart.”

Judge Rothenstein’s position is that PCW had the opportunity and means to detect the fraud if they properly conduct the audit they were hired to do. All defenses submitted by the audit company has been rejected by the judge, stating that they were negligent and responsible for bankruptcy of the bank.

Under SAS No. 99, “The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.” This new standard provides guidelines how to design the audit and assess risk of fraud that could occur. Exercising personal skepticism by the auditor is the most important factor. There were red flags observed during various audits and all of them were ignored and not considered by PWC personnel.

Detecting fraud is very hard because the higher-up executives are usually involved and they have the means to override internal controls and hide it successfully. Knowing this, the auditor should keep open mind and if any irregularities uncovered they should be investigated thoroughly. Due diligence is the best defense to every audit firm from being sued for not detecting fraud during audit. It is the company’s responsibility to design sufficient internal controls that will prevent the fraud in the first place. PWC if found guilty will follow steps of Arthur Anderson who went bankrupt after Enron scandal.

The money lost will not be recovered and lives of thousands of people damaged never repaired.

Sources:

https://www.forbes.com/sites/legalnewsline/2017/09/18/pwc-lawsuit-tests-whether-auditors-must-guarantee-against-fraud/#5cd7b84a5fbe

Definition for Pari Delicto:

https://legal-dictionary.thefreedictionary.com/In+Pari+Delicto

 

 

Accounting Group: Deloitte Hit with Cyber Attack

Posted by Michael Naoum.

Due to today’s technology, we have advanced into an era where information, computing, and interaction can all be done with a click of a button. A plethora of tasks can now be completed within a matter of seconds. Though this thought may sound great at first, there can also be many negatives associated with it. Unfortunately, the world that we live in is far from a utopia. As a result, many individuals use their knowledge in efforts to create evil rather than for the good of others. In her article, Madison Marriage explains how Deloitte was recently hit with a cyber-attack, the hardships the Big-Four company encountered while attempting to resolve the issue, and the lessons learned from the situation in order to prevent catastrophes like this from happening in the future.

To begin, it is important to understand the background of the company that experienced this cyber-attack. Deloitte is an incorporated multinational professional services firm with operational headquarters located in New York City in the United States. Deloitte is one of the “Big Four” accounting firms and possesses the largest professional services network in the world by revenue and number of professionals. Deloitte provides audit, tax, consulting, enterprise risk and financial advisory services with more than 263,900 professionals globally. As of 2016, Deloitte is classified as the sixth largest privately-owned organization in the United States. Based on this information, it can be concluded that Deloitte is a great target for hackers due to the value of information that the company carries within the firm. Unfortunately, earlier this year, they were contacted by governmental authorities in regards to a breach of information that was leaked, tarnishing the reputation of what is supposed to be a provider of excellent cyber security advice. Despite the irony of this, the attack was described by Deloitte as a “cyber incident” and was first reported by the Guardian newspaper, as a low blow due to the fact that security advice to large companies is one of Deloitte’s fastest-growing revenue streams.

In fact, in the month this took place, the accounting firm posted record global revenue of thirty-nine billion dollars saying that the cyberattack only affected a few clients. They also stated that the attack had “no disruption had occurred to client businesses, to Deloitte’s ability to continue to service clients, or to consumers”. Despite this, Deloitte had to act quickly and adapt to the situation. As a result, once the news was present, they mobilized a team of security and confidentiality experts inside and outside of Deloitte, contacting governmental authorities and immediately contacting all clients that were affected.

Overall, it is evident that companies as well as individuals who perform these tasks day in and day out are not safe from attacks. Unfortunately, Deloitte was a firm that had to learn this the hard way. Fortunately though, Deloitte had the manpower, knowledge, and funds to protect itself and was able to mend this issue before it spiraled out of control. In the future, I believe that Deloitte should have constant routine updates and checks-ins in order to prevent this type of data breach from occurring again. They should also have password changes every month or so in order to make it harder for hackers to get a hold of their private information. All in all, the firm had a statement that was released at the end of this fiasco to sum up the cyber-attack, “Deloitte remains deeply committed to ensuring that its cyber-security defenses are best in class, to investing heavily in protecting confidential information and continually reviewing and enhancing cyber security.”

Michael is an MBA student with a concentration in accounting at the Feliciano School of Business, Montclair State University, Class of 2017.

Marriage, Mary. “Subscribe to Read.” Financial Times, 25 Sept. 2017, www.ft.com/content/7c52fe88-

7bf1-3798-9d55-2d5498b53c20.

Forensic Accountant Witness: Disqualified

Posted by Diego Henao.

During vior dire, potential expert witnesses’ credibility and expertise is assessed to arrive at a decision if they are properly qualified to give their opinion in court. In the State of Utah, Judge Paul Parker has disqualified Gil Miller, a forensic accountant, from taking the stand as an expert witness for the prosecution team in the criminal trial against father and son, Wendell and Allen Jacobson, and their company Management Solutions Inc. This decision came about after the Jacobson’s attorney’s presented their argument that Gil Miller had a conflict of interest due to his previous professional involvement with the Jacobson’s and their legal team.

Miller participated in the defense of the Jacobson’s and their company in the December 2011 trial in which the SEC sued them for allegedly running a Ponzi scheme involving the purchasing and selling of apartment buildings. Miller’s role in this case consisted of being the accountant for the Jacobson’s attorneys, and because of this, he participated in the analysis of private information, and therefore, he should not be allowed to participate as an expert witness for the prosecution in the current trial. This was the argument that the Jacobson’s legal team brought to the attention of Judge Parker; they also mentioned how Miller was exposed to private documents, legal theories, and information and this should discredit his qualification, since he would now be on the opposing side helping the prosecution against the Jacobsons. The lawyer for Allen Jacobson, Amanda Mendenhall, argued that “ (Attorneys) must be able to rely on the confidentiality of the consultants they hire to assist in providing legal services to their clients. Without these protections it is scary to think an expert could be privy to critical defense strategy and then turn around and deliver the information to a prosecuting agency” (Harvey). The Jacobson’s attorneys also stated how during that SEC trial, Miller had provided their legal team with false information in regards to the work he had conducted.

Aside from wanting Miller to not participate in the case, the defense attorneys also argued that since Miller had already been in contact with the prosecutors, and therefore, had offered some sort of insight, he had “tainted” the case, and therefore, they demanded that the prosecution team be removed and replaced from this case. If Judge Parker would agree to this second demand, then the prosecution would be able to appeal this decision. The judge’s decision to disqualify Miller as an expert witness remained and concluded with the fact that he could not participate as an expert, but that he could still be a witness in regards to the facts of the case. This trial, which accuses the Jacobson’s of 16 felony fraud involved counts of failing to inform investors about how their investments were being managed is still yet to be scheduled.

Diego is a graduate accounting student at the Feliciano School of Business, Montclair State University, Class of 2018.

 

Works Cited:

Harvey, Tom. “Judge Says Prominent Forensic Accountant Can’t Be Expert Witness in Fraud Case Because of Conflict.” The Salt Lake Tribune. N.p., 19 Sept. 2017. Web.

http://www.sltrib.com/pb/news/business/2017/09/19/judge-says-prominent-forensic-accountant-cant-be-expert-witness-in-fraud-case-because-of-conflict

Spies vs. United States

Posted by Bader Alotaibi.

Murray R. Spies was found guilty of attempting to dodge income tax. The case turned on the determination of the exact sum of tax and how to collect and manage accounts and revenues.

“Petitioner admitted at the opening of the trial that he had sufficient income during the year in question to place him under a statutory duty to file a return and to pay a tax, and that he failed to do either.” The government sought to show Spies committed tax evasion. Petitioner testified as to his good personality, his illness at the period he filed his return and the lack of will, mainly because of mental disturbance, which signified something more than anxiety, but less than madness. At his trial, Spies asked for this instruction: “You cannot conclude that the Defendant is shamefaced of a considered attempt to defeat and avoid income tax if you discover that Murray R. Spies has not intentionally rendered taxable returns and has willingly unsuccessful to pay income taxes on that earnings.”

The Court reversed holding, “[W]e think a defendant is entitled to a charge which will point out the necessity for such an inference of willful attempt to defeat or evade tax from some proof in the case other than that necessary to make out the misdemeanors, and if the evidence fails to afford such an inference, the defendant should be acquitted.”

Bader is an MBA student at the Feliciano School of Business, Montclair State University.

Work cited

https://supreme.justia.com/cases/federal/us/317/492/case.html

 

 

The Essence of Tax Evasion

Introduction

Tax evasion is the practice of deliberately failing in an individual, corporate or trust’s obligations to remit their correct and due tax liability. The same can culminate into a criminal offense whose elements may require proof of omission or misinterpretation in the remittance or declaration of the correct tax position of the persons indicated above.

The article reviewed herein is “HMRC empowered to name and shame tax evasion ‘enablers,‘” an article done by Jessica Elgot in the Guardian newspaper on the 1st of January, 2017. The article, in essence, alludes to the directive given by the government, mandating the HMRC to target not only the evaders of tax obligations but also the parties who assist with the technical expertise to help the former in evading their obligations.

Review

The article begins with a commentary on the directive, indicating the punitive measures due to the parties that will be found culpable of enabling the crime. The penalty was placed on an amount of $3,000 or the amount they assisted the corporate or individual to evade, whichever amount is higher. The offense created, according to the article, will also encompass the omission to prevent an act of tax evasion. Though broad, the spectrum promises to have a deterrent effect on the players involved in the crime.

Further, the article goes ahead to speak to the future moves that the agencies anticipate about vanquishing the offense. The same entails reparative justice, which involves going after the offenders who have previously participated in the evasion of tax obligations. This final directive might encounter technicality issues due to the principle that laws do not operate retrospectively. However, considering the gravity of the offenses in question, the players, just like other law-abiding citizens, owe a duty to faithfully and honestly remit their taxes.

Source:

https://www.theguardian.com/business/2017/jan/01/hmrc-tax-evasion-enablers-fines