Executive Summary . 3
Background ...4
Objectives..5
Scope .6
Assumptions6
Limitations..7
Procedures performed.8
Findings...9
Source and support documents11
Executive Summary
It has become clear over the course of our investigation that there is a fraud perpetrator at Delta Technology, using the purchasing department to create false fluctuation in the stock a provisory supplier, for personal gain. After collecting all the available evidence, there is a clear pattern of abuse, and sufficient evidence for assuming guilt, as will be demonstrated throughout the following report. Based on this information it is clear that action should be taken to terminate the offending perpetrator, and to move to recover what funds possible through cancelation of future orders. A more detailed plan of action will be delineated within.
The fraud accountancy department at PwC was recently contacted by your company, Delta Technology regarding the need to further investigate certain suspicious numbers as they related to the purchasing department records. During an internal audit it became clear that purchases were being routinely made from Stockfit Precious Metals for alloys expensive alloys, which are integral in the process of making circuit boards, however it was also determined that these purchase orders overlapped with the orders placed to other, more major, suppliers and that there was no record that the related materials had been received. This pattern of expense, without tracked delivery, raised a red flag for a whistleblower in Delta’s accounting department, leading us to conduct a full investigation, and uncover the wrong doings detailed within.
Background
Delta technology is a company that actively engages in the creation and distribution of SD memory cards, external hard drives, jump drives and a variety of other memory devices. Working in close proximity to the larger technological sector requires the company to constantly work to remain ahead of the curve in terms of implementing new technology, and to work to provide quality product at the lowest possible price, despite the fact that certain circuits require access to certain rarer metals as a part of the production process, as they provide greater conductivity, and so better memory access overall.
As a competitive brand, Delta Technology Inc. is dedicated to monitoring its overall costs, and ultimately minimizing profitability losses that occur through wasteful spending. One of the ways that cost is controlled is by carefully monitoring all incoming and outgoing shipments of materials, and finished products, to ensure efficacy of the manufacturing process, and to eliminate potential waste, excess ordering and other weaknesses in the supply chain that ultimately degrade the integrity of the brand’s product pricing and sales as a whole. It was as a part of this routine inventorying and internal accounting that certain discrepancies were noted.
Overall, it was determined, internally, that there were quarterly orders, totaling more than $2.3 million which had been paid out for alloy product that was never received. Ultimately, there is just cause to believe that stock fraud was perpetrated by a single employee, now identified as Carlton Chapellow, manager of purchasing for production, engaging in fraudulent purchasing in order to increase his own dividend payments through stock ownership and stock manipulation.
Objectives
The objectives of the following report will be to define who perpetrated the fraud, how the fraud was perpetrated, the extent of the fraudulent activity, what damage was done by, or financial impact can be felt as the result of its perpetration, and what systems can be put in place to prevent similar fraudulent activity within the Delta company in the future. This will be executed through a careful and complete review of the facts, including a careful investigation of the fraud triangle, the profile of the fraudster, a close financial analysis of the fraud that was conducted, and an examination of the purchasing scheme used in the fraud’s perpetration.
Scope
The scope of the following report will be relatively narrow. It is interested solely in a case study of the fraudulent activity of Carlton Chapellow, and finding the extent of the perpetrated fraud in order to move forward with the most positive resolution process possible. As such, the report will include relevant background information, a full accounting of the forensic accounting used to investigate and draw conclusions about the case, and the recommended course of action to follow.
Assumptions
Assumptions primarily occur in the process of establishing the fraud triangle, which was used in order to narrow down the possible list of suspects in the case, in advance of the formal investigation. We assumed that the profile of the fraudster would fit within the fraud triangle, which insinuates both that most fraudsters are ordinary individuals who resort to crime, and not career criminals, and that fraudsters have three factors in common: pressure, opportunity and rationalization. As such, in all analysis of data gathered according to the following procedure, the information known will be broken down into those three questions, did the apparent fraudster have opportunity, pressure, and rationalization which would allow them to perpetrate the fraud that is depicted by the data. More specifically, the following assumptions were made.
The fraudster has some power within the company, giving them rightful authority to sign the PO’s in question.
The fraudster has ownership in Stockfit Precious Metals, or a partner on the inside of the company capable of offering him kickbacks
The fraudster is most likely male and in management
Limitations
The greatest limitations presented by our study is that there will necessarily be gaps in the data. Most fraudsters at least attempt to cover their tracks, as such, there were certain information that is not readily accessible, and this is because the given information becomes a part of the fraud itself. More specifically, it was determined that Chapellow destroyed or removed an estimated five pages of invoicing documentation from the files in order to cover his tracks. As a result the exact invoicing details could not be accessed for our research. Further, we had some difficulty obtaining information from the supply company through which the fraud was perpetrated, because they are not required or obligated to provide us with the necessary files to complete out investigation. Their compliance is possible, but by no means guaranteed. As a result, the company was reluctant to give us access to their banking records, specifically, for confidentiality reasons.
Procedures Performed
First indication
The first indication of the problem was internal, via accounting review. This resulted in the Delta Technology firm contacting us to launch a formal investigation.
Development of a Work Plan
A work plan was developed to ensure the best possible outcome for the investigation as a whole. The completed work plan is visible in Appendix A.
Collecting Evidence
We entered into Delta Technology, as a team, in order to gather evidence that reflected the total situation and substantiated the fraud allegations in order to both move forward with termination of involved parties and begin the recovery process.
Analysis of Data
The evidence was collected and analyzed in order to make an initial determination of what was known, and where the evidence pointed. All further investigation was to prove the theory developed during this stage.
Conduct interviews
Interviews were conducted regarding involved parties, in order to gather primary evidence and fill in blanks in the paper and electronic records.
Further investigate
We gathered relevant sensitive information including bank records, shipping records, and more.
Track down leads and draw conclusions
We made a final determination, based on the evidence of who the fraudulent perpetrator is, and how to proceed in the case against him.
Confront the suspect
This stage of the investigation process included confronting the suspect, taking his statement, and preparing to supporting the Delta as they proceeded with termination.
Document the Investigation
The current report will serve as a full documentation of the investigation, relating the details of the findings and resulting allegations.
Resolution
We established a protocol, or step-by-step process for recovering whatever assets possible, and preventing future similar fraud within Delta.
Close the case
Findings
The first indication of the problem was, as previously mentioned, discovered via internal accounting. More specifically, whistleblower Adam Langhigh noted that while cross checking supply orders against shipments received, that there were routine payments made to Stockfit Precious Metals for two kilos of palladium, per quarter. This was equal to roughly $35,000 dollars’ worth of quarterly purchases (Apmex, 2016). However, palladium was still being ordered bi-monthly from the company’s two primary suppliers for precious metal components, and there was no record of delivery for any precious metal deliveries from Stockfit Precious Metal. As a result, Langhigh notified both the head of accounting, Celina Mosby, and the head of HR that he suspected fraud. They then contacted us, and a work plan was immediately created to guide the investigation moving forward, in order to ensure that all the evidence needed was gathered to both fully expose the fraudster, and to fully document the fraud.
We began by collecting and reviewing Langhigh’s original findings, and verified that there were missing shipment of Palladium, based on the invoices and signed supply delivery receipts. We started trying to develop a profile for the fraudster based on what was known. The perpetrator had to be actively responsible for ordering supplies, and have the authority to sign P.Os in order for the purchase orders to be executed by accounting. Further, based on the amount of money that was involved, it was believed to be a member of upper management. Based on this, we centered our investigation around the manager of purchasing for production, the general manager of purchasing, and the executives above them in the organizational chart.
We then collected electronic records which supported our claim. There was a series of emails between Rick Ross at Stockfit Precious Metals and Chapellow establishing the company’s profitability, and the exact quarterly profit needed to boost the dividend payment per share. It caught the attention of the research team that none of the emails contained any information about the quality or use of the company’s metal products, or discussed physical order placement. This lead the team to focus specifically on Chapellow as the fraudster.
Interviews were conducted with the materials manager who noted that they had no knowledge of Stockfit Precious Metals, and had made no request to change suppliers for the palladium used in the chips. Similarly, the head of accounting did not appear aware that there had been new suppliers added to the supply chain, and had very limited information about the Stockfit Precious Metals account in the accounting file, which is to say the only information accounting had on the company was what Chapellow provided on the purchase orders, which he signed. The executive interviewed, Sam White, noted that he had a long standing relationship with the CEO at the current precious metal supplier for Palladium, Serfit Metal Supply, and would not have approved such a change in supply lightly, further he noted that the price paid to Stockfit Precious Metals was higher than the average price per ounce the company is currently paying for the metal specifically. When interviewing Rick Ross, he attempted to make a claim that Delta had contacted them about temporarily delaying shipment of the ordered goods, until their current contract was exhausted and supply of palladium used. However, this point was refuted by the paper record, which shows a continuation of the contract with the current provider which was approved by both White and Chapellow after payments to Stockfit Precious Metals commenced. The final interview, with Chapellow, yielded little gain, as he elected to bring a lawyer with him and invoke his 5th amendment rights. As a result of these interviews it was concluded that Chalellow was still the most likely fraudster, and that the orders to Stockfit Precious Metals were purely fraudulent in nature, as perpetrated by Ross and Chapellow in collusion.
Further physical investigation lead to the discovery that the purchases were padding the profit margins of the Stockfit Precious Metals Company as a whole, resulting in higher dividend payout, mutually benefiting both Ross and Chapellow who not only owned more than 15,000 shares each in the publically traded company, but ultimately were determined to be half-brothers, and beneficiaries of one another’s life insurance policies. The estimated gains were equal to $36,000 in dividends, per person, per quarter, in addition to contributing to stock division, creating the potential for larger future payouts. This gave the men a clear motive for the perpetration of their fraud.
Works Cited:
Apmex. Palladium Prices. 2016 March 14. Web.
Association of Certified Fraud Examines Profile of a Fraudster. N.d. Web.
Brytting, Tomas, Richard Minogue, and Veronica Morino. The Anatomy of Fraud and Corruption: Organizational Causes and Remedies. Farnham, Surrey, England: Gower, 2011. Print.
Source and support Document Appendix
Interview Summary:
Rick Ross entered the room and pulled the chair back away from the table, setting at distance of about 10 inches from us. He leaned back in the chair, appearing to be both at ease, and above the proceedings. We asked what his association was with the accused. He claimed that Chappelow had contacted him regarding precious metal supplies for the production floor. We asked specifically what kind of metals, and he correctly noted that all discussed and placed orders had been for palladium. We asked for the quarterly total and he correctly identified one to two kilos. We asked if he knew the disbursal dates for the delivery of those supplies and he said he did not. He first responded that they should have been delivered within seven to ten days of the invoice date, but then modified his answer to allege that all deliveries had been postponed at Delta’s request, based on a need to use existing supplies, and fulfill current contracts, before physically changing suppliers. He could provide no copy of a contract or purchase agreement to solidify his claims.
Appendix X: Main Character Relationship Chart
Carlton Chapellow– Senior Director of purchasing department
James Underwood - Manager of purchasing department
Celina Mosby – accountant (Fraud triangle)
Rick Ross – CEO of Stockfit Precious Metals
Stacey White– CFO of Stockfit Precious Metals
