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Search popular media – such as Yahoo Finance or even Youtube in order to find a case of fraud.  Once you select the case, write a short narrative explaining what happened in the fraud case, including a description of the parties involved, the type of fraud that was perpetuated, and the outcome to the incident.  You should include a link to the video or article about the fraud.

POST 1

Module 1 Discussion Fraud Triangle – Satyam Computers

COLLAPSE

The case that I chose to analyze using fraud triangle is Satyam Computers Limited. To start with Satyam Computers rose to fame in 1990s when the founder Mr. Ramalinga Raju was one of the first to spot the outsourcing opportunities in the year 2000 rollover problem. Satyam computers was even listed in New York stock exchange and Indian stock markets, they specialized in business software and back-office support for their clients in United States and across the globe. It started with only 20 employees and grew very rapidly. Company was ranked 4th largest in the industry of software after TCS, Infosys and Wipro. They expanded their business with several multinational tie-ups such as Microsoft, Emirates, Ford and having office set up in various locations around the world. After a failed a failed acquisition, Mr. Raju had admitted that he and his brother Mr.Rama Raju had manipulated the company’s accounts. Mr. Raju used his personal computer and created false bank statements to over state income statement and inflate balance sheet. He also created fake salary accounts and exploited money from it. Fraud committed by him, and his brother can be examined under theory of fraud triangle as follows,

The first element of fraud triangle is Pressure/Incentive. An individual is generally provoked towards committing fraud when under pressure of financial need. There is nearly endless list of reasons a person would feel compelled to commit fraud (Kniepmann, 2020). Mr. Ramalinga Raju, while confessing in front of the board said he was under no financial or personal pressure as they were financially strong. Mr. Raju’s famous statement was “Ride the Tiger”, though there was no financial pressure, his greed for power and success was the motivation for the fraud. Second element is the Opportunity, an individual gets to understand the organization and where fraud can be committed, and it is a clear course of action to committing fraud. Mr.Raju understood absence of adequate controls or his ability to override controls over financial reporting lead to committing fraud. Since Mr. Raju and his brother were in a position of being fully authorized of making decisions, they easily could hide all confidential financial data. Even though errors were too big to be covered, the publics auditors did not expose it. Lastly, final element in the fraud triangle is Rationalization. Rationalization involves fabricating a moral excuse to justify the fraud (Kniepmann, 2020). Rationalization makes it look neither suspicious nor seems to be fraud in any manner. An individual tries to provide a good cause for the fraud committed in a way which logically satisfies everyone. Incase of Satyam computer, before it could reach rationalization, Mr.Raju had admitted of manipulating the financials. What he did was out of greed, and he claimed that he only manipulated the numbers to close on acquisition, selling stakes at overstated price and to raise Satyam market value. In the year 2015, Mr. Raju was convicted and public auditors, PWC were barred from issuing audit certificates to any listed companies in India for 2years.

https://www.financialexpress.com/industry/what-was-satyam-scam-which-toppled-indias-fourth-largest-it-company-from-the-top-slots/1010389/

References:

Kniepmann, C. M. (2020, August 6). Fraud Triangle: Fraud Opportunity: St Louis CPA Firm. Anders CPA. https://anderscpa.com/the-fraud triangle-three-conditions-that-increase-the-risk-of-fraud/.

Girgenti, R. H., & Hedley, T. P. (2011). Managing the risk of fraud and misconduct: Meeting the challenges of a global, regulated, and digital environment. McGraw-Hill.

(S) feifeinannaner:

Include

Morgan Ferguson

Rachel Duncan Fraud

COLLAPSE

Fraud and misconduct are more common than one would like to think. Fraud refers to an intentional deception or lie and caused by an employee or organization for personal gain. The fraud triangle includes three aspects of fraud. They include opportunity, rationalization, and pressure. For this discussion post, I researched a fraud case that involved the Hospitality Association of South Carolina. In this case, Rachel Duncan, age 41, stole close to 500,000 over time as the accountant for this organization. When she was caught and sentences, she had to serve 30 months of federal prison and also had to repay 367,508 in restitution. She will also be a convicted felon the rest of her life.

Opportunity in this case was present and I believe any internal auditor could have found the issues immediately. Duncan’s predecessor was fired for embezzlement. As Duncan grew more trustworthy in the organization, there were also lack of internal controls like separation of duties. According to the article, she was in charge of nine bank accounts with little supervision. Clearly, this shows opportunity for fraud to happen, especially because it happened prior to Duncan’s employment there. For example, at my current job, I am in charge of multiple bank accounts, but we have internal controls to check and make sure there is no fraudulent activity. I send a daily email to three higher people with the daily balance of all our bank accounts. If they see something strange, they ask what happened.

Pressure is also present because later it was found out that Rachel Duncan had an online gambling addiction. Her fraudulent activity was funding her gambling addiction.

When it comes to rationalization, I could not find any reasoning as to why she rationalized her decisions. It could be because she believed she deserved it for her work at the organization or because she believed she deserved the money because of her gambling addiction. Many people rationalize fraud because they feel the company owes them more than what they are receiving in pay and benefits.

Fraud Triangle – Opportunity, Incentive, Rationalization (corporatefinanceinstitute.com)

Case Studies: The Fraud Triangle and the South Carolina Hospitality Association — Wessel Forensics 864-905-2850 (wesselaccounting.com)

(S) feifeinannaner:

Include

Bessie Tinsley

Module 1 Discussion – ValueWise Corp 

Attachment

COLLAPSE

ValueWise Corp & MyPayrollHR.com LLC

Michael Mann, owner and CEO of ValueWise Corp, used shell companies to siphon millions in customer funds between 2013 and 2019. ValueWise Corp is a payroll handling company for other businesses that include healthcare providers, restaurants, and religious institutions. Mann was able to commit fraud on these companies by using a web of fake companies and falsified assets, emails, audits, and bank exams, per prosecutors. (Larson, 2020)

Mann had the opportunity as the CEO of ValueWise Corp to steal employee and customer’s money and wire it into shell companies ran by Mann. Due to not being able to repay loans, Mann stole and diverted millions of dollars that were entrusted to his payroll companies. (Singman, 2020) Mann exploited the “float”. This means that he was able to exploit the time between getting the customers money and then when it needed to be paid out. He used this money to keep ValueWise Corp afloat and finance purchases of other companies. (Larson, 2020) Mann’s deception of these companies was done daily and resulted in over $100 million in losses.

Mann was able to keep up this deception for many years. It was not until one of his banks noticed suspicious activity and froze his accounts in August of 2019, causing many of his payroll companies to be unable to pay payroll for hundreds of small business customers nationwide. (Singman, 2020) Because of Mann’s actions, there are many businesses that were not able to recover, causing them to sue Mann. One such business that is suing Mann is Pioneer Bank. (Cropley, 2020)

At this time, Michael Mann has not been sentenced, although he has plead guilty. Mann has plead guilty to 12 felonies, including bank fraud, wire fraud, identity theft, and filing false tax records. He is facing up to three decades in federal prison and has agreed to repay victims $101 million. (Rulison, 2021) Prosecutors have also requested for Mann’s sentencing to be delayed so that additional victims have time to come forward and be able to attend the sentencing hearing in person, due to COVID preventing in-person viewing at the courthouse.

ValueWise 2019 Annual Report: https://incfact.com/company/valuewise-cliftonpark-ny/

References

Cropley, J. (2020, December 3). Pioneer Bank sues accounting firm for $34M lost in MyPayrollHR scheme. Retrieved from The Daily Gazette: https://dailygazette.com/2020/12/03/pioneer-bank-s…

Larson, E. (2020, August 28). Payroll Handler Pleads Guilty in $100 Million N.Y. Fraud Case. Retrieved from Bloomberg: https://www.bloomberg.com/news/articles/2020-08-28…

Rulison, L. (2021, February 24). Sentencing for admitted MyPayrollHR fraudster Michael Mann delayed. Retrieved from Times Union: https://www.timesunion.com/business/article/Senten…

Singman, B. (2020, August 12). ValueWise CEO pleads guilty to $100M fraud that left companies, workers on the hook. Retrieved from Fox Business: https://www.foxbusiness.com/money/valuewise-ceo-pl…

File ValueWise Corp.docx (21.331 KB)

COLLAPSE

HealthSouth, one of the largest healthcare services of the USA at the time, drew the ire of the SEC when it was accused of a large corporate accounting scandal. The now infamous $2.8 billion accounting scandal took place over a course of six years from 1996 to 2002. Richard M. Scrushy, the founder and CEO of HealthSouth, instructed its employees to report highly exaggerated profits for the company. This revenue manipulation allowed Mr. Scrushy to control the stock prices of the company and therefore gave him the ability to attract new investors as well as satisfying current investors. (Bhatt, 2020) As cases of fraud usually do, this revenue manipulation manifested into a larger problem as the years went by and by 2003 the company was earning record profits with recorded annual revenue at approximately $4.5 billion. (United States Securities and Exchange Commission, 2005)

Having already been accused of financial statement misrepresentation by the SEC in 1998, HealthSouth made the headlines again in 2002 when the SEC investigated an incident where the company sold over $75 Million worth of shares just before it reported a huge loss on the financial statements.

By 2003, the SEC announced that the company had been exaggerating its revenues to the limit of $1.4 billion. Not surprisingly, the shares of HealthSouth fell overnight. The CEO was charged for fraud but acquitted of all the charges. In the end, he was only convicted of bribery. He, along with the CFO and a few other officers of the company was imprisoned for a term of five years. Multiple hefty fines were imposed on the involved individuals in addition to prison sentences. Although the company is still functioning and doing quite well again, this fraud ruined many people’s financial lives and set back HealthSouth drastically. (Hamilton) For more information on this case of fraud, please see the following link: http://www.arxisfinancial.com/images/pdfs/Fraud-Healt

The opportunity for committing this fraud is very easy to see since it originated at the highest level in the corporation management, the CEO. Since the CEO put pressure on the upper management below him to manipulate revenues, this put the CFO and other executives in a tough position to comply. The incentive pushing the CEO to do this was the pressure placed on him and the company to meet revenue goals to boost the company’s standing with investors. When sales fell short of revenue goals, the CEO felt the need to manipulate revenues. The rationalization that the CEO and others involved turned to was the belief that they were either helping the company maintain what appeared to be healthy metrics, or the belief that they were just following orders.

Bhatt, A. (2020, May 20). HealthSouth Scam: Reasons, Investigation, Inquire, Judgement and Aftermath. Retrieved from TheCompanyNinja: https://thecompany.ninja/healthsouth-scam-reasons-investigation-inquire-judgment-and-aftermath/#:~:text=HealthSouth%2C%20one%20of%20the%20largest%20healthcare%20services%20of,profits%20for%20the%20company%20to%20woo%20more%20investors.

Hamilton, C. (n.d.). HealthSouth: A Case Study in Corporate Fraud. Retrieved from ArxisFinancial: ww.arxisfinancial.com/images/pdfs/Fraud-Health_South_Case.pdf

United States Securities and Exchange Commission. (2005, June 27). HealthSouth Form 10-K Annual Report for FYEs December 31, 2000 through December 31, 2003. Retrieved from Getfilings: http://www.getfilings.com/o0001193125-05-131361.ht…

POST 4

Module 1 – Group Discussion

COLLAPSE

In November 2019 a whistleblower released video showing how CannTrust, a large Canadian cannabis producer, was using unlicensed growing space at its Pelham Ontario facility. The video shows windows covered up to conceal the growing spaces and CannTrust confirmed that it was real. Health Canada, the department in charge of issuing the growing licenses, found that between 2018 and 2019 CannTrust grew millions of dollars worth of cannabis and mislead investors. According to its 2018 annual report its gross revenue more than doubled in 2018, going from $20 million to $48 million, largely helped by the use of illegal growing spaces (CannTrust, 2018). The company’s former CEO Peter Aceto, former board member Eric Paul, and former director Mark Litwin face several criminal charges and up 5 years in jail if convicted (Lagerquist, 2021). Their charges include fraud, insider trading, and making misleading statements to the Ontario Securities Commission.

Two of the three elements of the fraud triangle are clearly present in this case. The senior executives’ performance is partially judged by the company’s stock price and they also receive stock options as part of their compensation. In 2018 this total stock option compensation was $6 million. There is also a shortage of licensed growing space due to a backlog at Health Canada. These factors created the perceived need/pressure part of the triangle. Their facility had ample space and resources for growing plants illegally and this was the opportunity. The Pelham facility boasted 450,000 square feet of licensed growing space and the company had a facility in Vaughan, Canada and plans to open a second facility in Pelham. The rationalization the executive may have used is reasoning that their lack of growing licenses was not their fault so they shouldn’t have to suffer the consequences of not having them, which in this case meant limitations on their ability to generate revenue. They may also have viewed themselves as good citizens addressing a societal need since the company served 69,000 medical patients with their products.

CannTrust (2018). 2018 Annual Report. Retrieved from https://canntrust.com/wp-content/uploads/2019/05/2018_CannTrust_AnnualReport.pdf

Lagerquist,J. (2021, June 22). CannTrust’s Former CEO, 2 Executives Face Possible Jail Time in Fraud Case. Retrieved from https://uk.sports.yahoo.com/news/cann-trusts-former-ceo-2-executives-face-jail-time-in-fraud-case-142009479.html

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