Bulldog gets the worm: In a case of missing inventory, persistence, vigilance, and a little luck pay off big - Fraud Findings

Internal Auditor, Dec, 2001 by Courtenay Thompson

Mark had worked for an oil company and understood inventory exchanges or swaps, but this was different. In the simplest type of swap, one company exchanges product at point A, which is exchanged for equivalent product at point B. More complex exchanges can involve multiple companies and monetary differentials to compensate for factors such as differing quality.

Mark knew how difficult it would be to locate the company that Chaseman exchanged product with, and he was not prepared to look for a needle in a haystack. Fortunately, he got lucky again: The manager's business unit had retired an old personal computer that had been shipped to corporate headquarters. Mark was able to have it shipped to his office so that he could analyze the hard drive. He found that the files had been deleted but not written over.

Using forensic investigation software to analyze the deleted files, Mark found a curious set of transactions that were not part of the general ledger or journals. In aggregate, they came to a debit of $4,085,805. The related credit balance -- $2,111,077 -- was exactly the value of the inventory missing from the bankrupt processor.

Now, Mark knew where to look for the needle. He obtained information from a reporting service that detailed all the export shipments from the United States for the period corresponding to the time of the shipments to the processing plant. Mark identified four shipments that agreed in total to the quantities of the missing inventory. Applying the unit cost used to bill the producer, the total amounted to $2,111,077. With the then-prevailing spot market price for Mexico, Mark extended the quantities and tied into the $4,085,805. He then understood what had happened, but wasn't sure how he was going to obtain proof.

Rather than pursue the "get real" prosecutorial gambit, Mark was able to identify the Mexican importer, which turned out to be a subsidiary of a major U.S. company with which XYZ bad numerous dealings. The external company's internal audit department provided the payee information, and -- to make a long story considerably shorter -- it was an export company jointly owned by Chaseman and the owner of the bankrupt processing plant. Tracing the various entities and movements of cash and product exchanges took well over a year and a half and involved contacting 37 different external companies. During this time, Mark became known as "Bulldog."

Given the complexity of the various product exchanges and funds movements, which were much more intricate than the abbreviated version above, XYZ's attorneys recommended restitution rather than prosecution. XYZ recovered approximately $3.1 lion, which represented the cost of the missing inventory and half of the profits. That was sufficient to bankrupt the business that had been started by the former XYZ manager.

LESSONS LEARNED

* In management fraud, which is frequently relational and off-books, rather than transactional, external records and information are necessary -- and available.