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Going Above and Beyond - Uncovering Fraud During a Routine Tax Engagement

 

Background
We were hired by a clinical trial monitoring company to prepare their corporate tax returns. It seemed like a routine engagement until we found several unusual entries during our review of the company’s general ledger. These entries prompted us to ask for copies of the corporate credit card statements, but our request was met with a great deal of resistance from the company’s controller.

 

Challenge
While the company was affiliated with a much larger, international firm, the accounting staff of the U.S. entity included only the controller and CFO, who had a medical, not financial, background, and lived in a different state. We recognized that there was limited oversight in the handling of revenue and expenses and that the small size of the accounting staff made the proper separation of duties nearly impossible.  For these reasons, we implemented additional procedures beyond what was required as part of the engagement in order to ensure their books were accurate and that the information being reported on the tax returns was correct.

 

Solution
While the tax return could have been completed without obtaining the credit card statements, we were seeing activity that was inconsistent with what we had been told by the controller so we persisted in obtaining them.  When we finally received the year-end statement, we found purchases at nail salons, restaurants, and other retail outlets – none of which appeared to be work-related.

 

We immediately contacted the company’s CFO who thought that the charges were likely for holiday gifts that had been purchased for company staff and other business associates.  He resisted reviewing the statements but finally agreed, eventually realizing that many of the charges were not business related but were for an employee’s personal expenses.

 

Results
After uncovering the fraudulent charges, we worked with the client and identified the controller as the culprit.  She was immediately terminated and the company began the process of working with the authorities and the credit card company to prosecute the employee involved and assess the magnitude of the fraud that had taken place.

 

In total, more than $90,000 of personal expenses had been charged to the corporate card over an eight-month period. Unfortunately, the company was not able to recover the funds, but we assisted them with identifying the appropriate tax treatment and timing to write-off the loss. We also helped them to implement a more stringent set of controls in order to prevent a similar situation from occurring in the future.