Fraud Auditing, Detection, and Prevention Blog

Mastering Shell Company Detection: Practical Steps for Fraud Auditors: Part 5

Nov 15, 2023 12:14:12 PM / by Leonard W. Vona

In this series of blogs, we are looking at the practice of using a fraud audit to detect shell company schemes occurring in an accounts payable file. Because the practice of effective fraud auditing is grounded in knowledge, we will start with a knowledge section and then delve into a demonstration of the fraud audit process.

Up close and personal trivia about Leonard W Vona 

Answers to last blog's trivia questions:

How many Leonard W Vona’s are in the United States? To the best of my knowledge one.

The town of Vona is located in which state in the USA? Colorado, population of 95 

Believe it or not, indicates that Vona is a top trending girl's name? True.

Believe it or not, I credited the women of my life for my professional success? True.

The most visitors to my website are from the USA. What country has the second most visitors? India.

From the age of 15 – 30 what sport did I actively participate in? I was an acrobatic gymnast.

Knowledge Section

Does Russia have LLC? 

A limited liability company in Russia is actually defined as an OOO. It is the type of Russian company best suited for businesses with foreign capital. Foreign investors can choose to set up a limited liability company in Russia regardless of their activity.

There are three types of business entities in Russia:

1. Private limited companies (Russian: общества с ограниченной ответственностью, abbreviated OOO)

2. Joint-stock companies (акционерное общество, abbreviated ПАО; in English as JSC), which may either be public, open (OJSC) or private, closed (PJSC)

3. partnerships (товарищество).

How do I search for a company register in Russia?

Russian companies' registry data is available to be searched via the website. This data is up to date and free but limited by company name, unique registration number, address, and short list of latest registration actions without details.

So, why am I talking about China (in last month’s blog) and Russian LLCs? If you are a global company, you will have entities from foreign countries. You will need to be able to perform covert research on any company anywhere in the world. Sometimes it is easy, sometimes difficult.

Practical Application

In this phase of the fraud audit, our procedures are overt and mirror more traditional audit procedures. However, the real difference is that in conducting the interview, the fraud auditor has a base of knowledge that the traditional auditor would not have. This is the process:

  • Perform overt research on the fraud action statement.
  • Examine internal documents.
  • Conduct interview of internal person that caused the vendor to be selected based on the totality of the evidence collected.


Note that the entity must be a shell company rather than a real company. The fraud action statement has three basic schemes:

  1. False billing: paying for services not provided or paying for goods not provided.
  2. Pass through scheme: paying for goods or services that were provided.
  3. Conflict of interest: paying for goods or services that were provided. The vendor has one or more owners that have legal or beneficial ownership in the vendor. In this type of conflict of interest scheme, the vendor only has one customer compared to a real vendor that has many customers.


Your audit procedures must be tailored to a specific scheme and must be based on the quality of the audit evidence. As a reminder, we judge quality based on the authenticity of the audit evidence. Let’s illustrate the audit concept with the following examples:

False Billing

The auditor is gathering evidence that a service was performed. Since the logical perpetrator is the manager approving the invoice, we must discount that control at this point. The following illustrates the type of evidence we would gather to determine if there is credible evidence that a service was provided.

1. Did the service provider prepare a report?

2. If there is no report, is there independent verification of service being provided? Obviously, this will vary based on the nature of the service. The measure of a cleaning service versus would be different than an outsourced internal auditor.

3. Examine emails between the manager and the service vendor.

4. Examine the manger’s appointment calendar for evidence of appointments between the vendor and the manager.

5. If you have telephone records, is there any phone call between the manager and the vendor?

6. Depending on building access controls, is there any evidence that the vendor was in the building?

7. Interview department employees about their knowledge of the vendor or the vendor working in the office.

Pass Through Scheme

These schemes can occur via tangible goods or services. While my experience suggests tangible goods are more likely, I have seen the scheme occur through service suppliers. Remember, in a pass-through scheme, you do receive the goods. But the question is who shipped you the goods?

Packing slips often have the information you are looking for, if the packing slip is not retained, you may have to go to the receiving dock the next time the goods are delivered. I am sure the trucker will have evidence of the shipping location.

Now based on the line-item descriptions, search the internet to determine who manufactured the item. Determine the reasons for purchasing from a middle person rather than directly from the manufacturer. Trust me, there are a lot of valid reasons.

Conflict of Interest

In this scheme, you have received the goods or services. It may be at a fair price assuming no kickback There is only one question, why are we purchasing from a supplier that has only one customer? Most likely, the covert research provided you with sufficient information. The critical issue is determining the true owners of the company.

In the interview with the manager responsible for selecting the vendor, ask the tough question. How did you learn about this company? Why did you select this company? What do you know about this company?


Remember the goal of the overt audit procedures on the company identity and the covert examination of the fraud action statement is to gather information for the eventual interview. Never ask a question, that you do not know the answer to. Yes, this interview is more like an interrogation than an internal control interview.


What is the origin of audit as we know it today?

What is the first record of a required audit? Why?

What was the first professional organization to provide training to auditors?

Which country was the first exam offered to certify auditors?

In what year was the first exam offered?

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Topics: Fraud Risk Statements, Fraud Schemes, Fraud Auditing

Leonard W. Vona

Written by Leonard W. Vona

Leonard W. Vona has more than 40 years of diversified fraud auditing and forensic accounting experience. His firm, Fraud Auditing, Inc., advises clients in areas of fraud risk assessment, fraud data analytics, fraud auditing, fraud prevention and litigation support.