Fraud Investigators


Fraud investigators found that 70 percent of the nearly $160 million in sales booked by an Asian subsidiary of a European company between September 2006 and June 2007 were fictitious. In an effort to earn rich bonuses tied to sales targets, the Asian subsidiary’s managers used highly sophisticated schemes to fool auditors. One especially egregious method involved funneling bank loans through third parties to make it look as though customers had paid, when in fact they hadn’t.

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In a lawsuit filed by the company’s auditors, it was alleged that former executives “deliberately” provided “false or incomplete information” to the auditors and conspired to obstruct the firm’s audits. To fool the auditors, the subsidiary used two types of schemes. The first involved factoring unpaid receivables to banks to obtain cash up front. Side letters that were concealed from the auditors gave the banks the right to take the money back if they couldn’t collect from the company’s customers. Hence, the factoring agreements amounted to little more than loans.


The second, more creative, scheme was used after the auditors questioned why the company wasn’t collecting more of its overdue bills from customers. It turns out that the subsidiary told many customers to transfer their contracts to third parties. The third parties then took out bank loans, for which the company provided collateral, and then “paid” the overdue bills to the company using the borrowed money. The result was that the company was paying itself. When the contracts were later canceled, the company paid “penalties” to the customers and the third parties to compensate them “for the inconvenience of dealing with the auditors.”


The investigators also found that the bulk of the company’s sales came from contracts signed at the end of quarters, so managers could meet ambitious quarterly sales targets and receive multimillion-dollar bonuses. For example, 90 percent of the revenue recorded by the subsidiary in the second quarter of 2007 was booked in several deals signed in the final nine days of the quarter. But the company was forced to subsequently cancel 70 percent of those contracts because the customers—most of them tiny startups—didn’t have the means to pay.




1) List revenue-related fraud symptoms and schemes used in this case.







2) Briefly discuss how actively searching and understanding revenue-related fraud symptoms could have led to discovering the fraud by the company’s auditors.

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