Fraud or incompetence?

Fraud or incompetence?

Didn't find your answer?

Apologies for the anonymity but I think it is understandable in this case.

I started with my current employer recently and am preparing the first set of accounts since joining. During the process I have uncovered an enormous potential understatement of liabilities in previous years.

In past years external advisors have prepared a report estimating the amount required to settle a liability. A very different amount was included in the financial statements. This difference is very material to both net assets and prior years reported results. When working out how the previous years' figures were calculated it transpires that an estimate was used that management knew to be understated and to have no firm basis in reality.

The auditors were never shown the external report and did not know of its existence. The previous CFO knew of the report - he signed off the invoice for its preparation. The previous CFO also signed a management representation letter stating that the liability was fairly stated. The report was not presented to the board at any stage.

The charitable view is that the CFO did not now what the report really meant although this is very difficult to believe. If that's the case then the CFO was simply incompetent. If not then I can only draw the conclusion that the report was deliberately buried and it must be a fraud.

The company probably has not actually suffered from the report being buried but shares have been issued since then so there is almost certainly a case for shareholders to take action?

Any advice from members that have seen anything similar before I ask an external party to investigate and talk to the lawyers?

Thanks.
Anon

Replies (4)

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By martinfoley07
20th Mar 2009 08:58

it does not seem clear.......
.....what anon's position in the company actually is.
It might be that he is the new CFO who is concerned about the behaviour of his predecessor.
But he does not say so, nor give any detail as to reporting lines (almost implies there is some sort of management team and some "main" board with no commonality of personnel).
Or are you concerned about the CEO, plus ex CFO, deliberately keeping the non-execs in the dark? And CEO remains?
And puzzled by remark about "external party" - what external party do you have in mind?!
And the lawyers - is anon responsible for appointing / consulting the company lawyers or not?

Need much clearer explanation of positions. Particularly since you seem to strongly imply you do NOT seem to suspect "the board" or the auditors of any wrong-doing.

You will only get helpful input and support from someone to whom you can give the full picture and who can "quiz you". Not therefore sure a public blog can achieve too much for you, as I assume you are (very rightly!!!) wary of being explicit.

But one thing that can and definitely should be done, anon, is call your professional body for confidential advice - and do so immediately. You can give them far more detail as to the exact situation and they can comment accordingly.

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David Winch
By David Winch
20th Mar 2009 08:13

Dave P is right

I was assuming that your seniority was such that you routinely reported to the board of directors (even if not being a director yourself).

However if you routinely report to a CFO or FD then that is to whom you should report this.

If you think that the CFO or FD to whom you report is dishonest and will suppress the information, then you have a different problem (along the lines of, "Do I want to stay in this job?").

David

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By Dave Paveley
20th Mar 2009 07:35

You say that you are an employee..

..then just tell your immediate boss. Job done.

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David Winch
By David Winch
19th Mar 2009 22:37

Report to the directors

You do not say whether you are a director of the company. You may even be the sole director - but I assume you are not.

I suggest your first step is to report the problem formally to the board of directors and disclose to the board the report of the external advisors.

Keep your report factual. For example say, "Attached is a copy of the report of the external advisors which I understand has not previously been seen by the board". Do NOT say "Attached is a copy of the report which was concealed by the previous CFO" - because that is an allegation of dishonesty which you cannot prove.

Set out the issues, such as, (i) should the external advisors' report now be disclosed to the auditors, (ii) should a fresh report be obtained from external experts (either an update from the same advisors or a second opinion from other experts), (iii) should the auditors be asked to advise on whether previous accounts need to be restated, etc.

The board can then decide whether to call for professional advice and whether the accounts of previous years need re-stating.

It does seem that there is a problem in that the accounts have not reflected the opinion of the external advisors and that opinion has not been disclosed to the board or the auditors.

Perhaps the management were genuinely of the view that the external advisors had misunderstood the position and had formed an invalid opinion. Even so the proper thing would have been to disclose the external advisors' report whilst expressing misgivings as to its validity - and leave the board to decide the issue.

You are saying however that management knew the liability to be understated and to have no firm basis in reality.

Even so, I believe your duty is to make full disclosure to the board - and let them take it from there.

You don't have to form an opinion as to whether the previous non-disclosure was dishonest or whether the issue is one of fraud or incompetence. (I think you would be best advised to strive to keep an open mind on that - you don't have all the relevant facts.)

You should not disclose this problem to anyone outside the board (i.e. not to shareholders who are not on the board and not to the auditors). The board should disclose it to the auditors and (at a later stage) to the shareholders (because, as you say, it is material to the accounts). Obviously you should not yourself sign off any letters etc to the auditors which are misleading or untrue.

In due course the auditors may have to decide whether they need to make a report under MLR 2007 / PoCA 2002, but again that is not a matter for you.

David
www.AccountingEvidence.com

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