In our next two blogs concerning shell companies, I will highlight real-life shell company schemes detected by our firm using the fraud audit methodology discussed in our blogs. Remember, all these schemes were found in large publicly traded companies using the fraud audit methodology discussed in the last seven blogs. I have changed the names of the companies to respect the confidentiality of our clients. It is important to note that there were no allegations, no whistleblowers, and no leads.
As you read, ponder the following questions:
If you are performing a traditional internal control audit, using a random sample, would your audit have detected the fraud scheme?
As you see the red flags that caused us to be suspicious, at what point would you have been convinced that you needed to stop auditing and start investigating?
A vice president caused R. Consulting, Inc. to be added to the vendor master file. The vice president stole $130,000 in one month through four invoices numbered in a sequential pattern: 1, 2, 3, and 4. The first two invoices bore the same date, and each invoice was below the control threshold (however, together the first two invoices exceeded the control level). All transactions were recorded in the same cost center. The invoice description indicated “consulting services.” We identified this as a created shell company scheme with the action statement being a false billing.
In this example, the perpetrator created three different shell companies with different addresses in different states. The transactional analysis revealed the scheme because all three companies used the same invoice numbers, dates, and invoice amounts.
The link between the three different companies occurred in the document examination. The three invoices for each month had the same error on the paper invoice. The coincidence suggested to us that the invoices for the three different companies were created by the same person. They were also recorded in the same cost center. The organization’s losses from the shell company scheme were $19,800, and the total losses from all the perpetrator’s schemes exceeded $150,000.
The moral of the story is sometimes the perpetrator does one large scheme and sometimes they commit a lot of small schemes. Once you find a fraudulent transaction, target your audit to the perpetrator sphere.
Lunoid Inc. outsourced computer programming services for more than $5 million per year. We investigated a potential shell company that provided programmers who worked remotely. First, we identified the general-ledger categories that would lend themselves to a pass-through scheme. Next, we compared invoice number patterns among all vendors in the same general ledger category to determine the normal pattern of vendor invoices. The invoice number analysis didn’t reveal any strong clues. However, anomalies in the line-item description fortunately revealed the perpetrator. Though line-item descriptions usually aren’t useful in identifying shell-company schemes for services, we followed the old adage, “If you don’t look, you can’t see.”
Manunte Inc. used a vendor, SLP Consulting Inc. The invoice-number pattern was sequential, but all the invoices were in a 30-day period. We didn’t see any pattern in the invoice dates or amounts. The invoices started with a high five-digit invoice number that provided the illusion of an existing company. To be clear, SPL Consulting was a real company operating in the marketplace.
Our investigation determined that the wife of the vice president of human resources at Manunte was providing these consulting services for a total cost of $120,000. We identified SLP Consulting as a conflict-of-interest shell company.
Okay, I am going to take a chance, here is my email, lvona@leonardvona.com If you have an idea for fraud trivia, I will list your fraud trivia, give your credit, if you want credit or I will list the source as anonymous. All I ask is that you provide a source of the information.