Type of Matter:
The Board of Directors and senior management of a large company with several divisions began to suspect that a division controller was embezzling significant amounts of cash. They initially brought in the outside auditors to review bank reconciliations and other reporting for the division. The company spent material amounts of money for up to 6 staff members from the outside audit firm reviewing bank reconciliations for over a week. The Board members began to get uncomfortable with the results of that review and decided they needed a focused fraud examination and called Arxis Financial.
At the initial meeting with Arxis Financial, the bank reconciliations were specifically excluded from the work scope approved for Arxis. While this was understandable due to the enormous cost of reviewing them already, it became a point of significant contention. Ultimately, we refused to take the engagement unless we were allowed to review the bank reconciliations – essentially covering the same territory as the outside audit firm. Either the reconciliations accurately reflected the activity in the accounts or they were being fabricated to hide illicit activity. Either way, it was the logical starting point.
Once we were authorized to review the bank reconciliations we began work. On the first day it was determined that the reconciliations were indeed problematic. What became apparent very quickly was that the beginning cash balance on any given reconciliation did not agree with the prior month’s ending cash balance. The client was relieved that it did not require a week of Arxis Financial’s time to evaluate the reconciliations.
Once we had proof that there were anomalies in the accounting for cash, further investigation was initiated to determine if the discrepancies were the result of human/software error or the result of intentional manipulation and misrepresentation.
We found that material and significant misappropriation of company assets had taken place over an extended period of time. As a result of our fraud investigation, the Controller was terminated, arrested, subsequently convicted, and is serving time in state prison. The method of hiding the embezzlement was so simple that apparently 6 auditors didn’t think to check it, which although disappointing to the company, is a key reason why a professional fraud investigation team should be engaged to investigate such suspicions.
We provided several recommendations for company management in order to minimize the chances of future embezzlement. The company was greatly pleased with Arxis Financial’s expertise, expediency, successful investigation and recommendations.