Wirecard, a German Fintech company, just lost 1.9 Billion Euros. A more accurate description is that it likely never existed (Business Insider article). Wirecard inflated revenue by round-tripping transactions. Basically creating potentially fraudulent transactions across borders to avoid scrutiny of local auditors. Fraudulent revenue can be used to increase the cash accounts on the balance sheet fooling lenders into providing more loans. How does this happen and why wasn't it uncovered sooner?
When audits go sideways and the Forensic Accountants, Trustees, and Receivers are called in, techniques like random sampling and confirmations are not enough. To get comfortable with client data in a distressed situation, professionals often resort to recreating the books from evidence. In these high stakes scenarios, tens of thousands of dollars were paid to low skilled labor to transcribe data from bank statements.
“During our analysis, we found that the majority, approximately 75% of our incurred time, was spent up front preparing data to be both accurate and standardized. Once we had clean, accurate data, the categorization, analysis, and formatting of the results was straightforward.” – Jeffrey Bussell
A trustee’s chapter 11 commercial bankruptcy case objectives are simple.Ensure everyone associated with the case follows adheres to the laws established for federal bankruptcy court. Maximize the return and payment to creditors and stakeholders. To achieve these goals, one thing matters more than anything else, establish command and control of the operations cash flow. These three steps provide every trustee with knowledge, information, and intelligence required to achieve case objectives.
Assembling a database of independently sourced transaction evidence is critical for any Fraudulent Transfer or Financial LItigation. Gregory Hays, CTP, CIRA, President NAFER, recently published some guidance as a chapter of a recent publication called Fraud and Forensics, Piercing Through The Deception of a Commercial Fraud Case. This blog contains a few excerpts from the book along with VALID8 recommended best practices.
Day 1 with perpetrator: “All the financial statements and most assets are falsified.” One of the first statements given by the perpetrator during our first discussion. That meant we couldn’t trust any accounting records or financial statements. The only thing left was the money came in and went out of several dozens of bank accounts from a handful of financial institutions over a decade or so. We worked with attorneys to draft subpoenas for every single bank statement and use those documents to recreate what had happened.
Cash flow is everything. Standard accounting procedures if controlled properly, do a fine job of tracking how/where money is made and spent. However, after spending a lot of time with distressed business clients in the underwriting, restructuring, workout, and Chapter 11 commercial bankruptcy world, you quickly realize accounting procedures aren’t always followed as they should be and management controlled books are often incomplete at best and inaccurate at worst.