Assurance And Forensic Accounting

D-Merton is a very profitable hi-technology based company with across 400 million revenues. Fortunes of D-Merton had boosted with the launch of S1 technology. During S1D launching, everyone in the company expected a bright future for the company in the IT industry but, it was their false assurance, due to the fraud activity in the organization. From the understanding of the following case study, many key issues have been recognized that can be associated with fraud act like testing firm was the same firm that designed the testing tools, financial limitation, time boundation to launch S1D, diversification, increasing cyber attack to break security, weak internal control, inappropriate assessment of the company’s defense.

The technical team had carried out 20 different pen tests, including browser exploits and analyzed a range of vulnerabilities, dos attacks, phishing and troj. These tests identified 50 serious flaws in the defenses in the overall system or designed database. The major issue was there that there were 4 different IT systems running with the inherited group from acquisitions and all of these IT systems had different protection level. In that case, the chances of attack by outsourcer have increased to break the protection level. The Board of Directors also showed doubt for their current technology and their original technology. They were not sure about the new technology’s reliability.

Some other ethical issues are also recognized from the case study, like employees wanted to take decisions on individual basis & according to their own perception which created conflicts with their colleagues (CSO, 2017). During discussion in meetings, they covered the part of personal relations to perform business activities which created biased behavior in the company.

Fraud Triangle

The Fraud triangle is a designed framework that explains the reasons behind an employee’s decision to commit fraud at their workplace. The main stages of Fraud triangle are Pressure, Opportunity & Rationalization. These are the main factors which lead to unethical behavior or fraud (HRZone, 2017). With the help of this fraud triangle framework, we can easily understand the reasons behind committed fraud at D-Merton. As we know, that it is necessary to maintain transparency in business operations to enhance reliability and overall efficiency but here, situation seems to be different. All the employees have independent understanding about created business issues like reduced revenue, cyber attack, limited financial facility etc. So, they all have different ways to overcome that situation & they take decisions independently by their own perception and some of them adopt unethical behavior and commit fraud. Now here, we correlate the stages of fraud triangle with the actual incident at D-Merton.

Pressure - Pressure is one of the main angles that examine the fact behind the act. It can be used as a motivation which influences a person to commit such type of fraud act (EY, 2011). In a case of D-Merton, Financial limitation became a major reason to create such type of pressure.

Opportunity - An opportunity must be present in the mind of fraudster. It’s a temporary situation that arises in which people perceive it as  a chance to commit an unethical behavior without a chance of being caught (CLM, 2017). When a company does not aggressively and actively investigate all the fraud claims, then such type of opportunities increased. At D-Merton, the main reasons that exist in this stage of fraud triangle are poor internal control, diversity, biased behavior and weak processes & procedures.

Rationalization - It is a cognitive and final stage in the fraud triangle. It requires an individual to be able to justify such unethical behavior in their own way i.e. acceptable to their internal moral compass (ACFE, 2017). There are many points like the company is not paying enough; company deserves the loss, any type of dissatisfaction in employee’s mind etc (AGA, 2017). During the discussion with the employees, there were various statement identified like high remuneration package of new CEO and auditors’ personal relation with Premintel etc. So, these are some points that may have driven the employees to perform any unethical act.

To form opinion, an auditor gathers sufficient evidence, appropriate information, tests and compares and then confirm after reasonable assurance. Auditors then give their opinion whether the given financial statements are free from material misstatement or it is due to error and fraud (GRFCA, 2017).  In a case of D-Merton, issue of reliability was the major concern. During the meeting of the top level management, the main topic under discussion was whether they should appoint the new auditors because of the current issues like reduction in sales of S1A and inappropriate cash flows. CFO also shows his doubt for the actual current value in the financial statements. Auditors also raised the query about the changes between using technology and original technology. They didn’t get the appropriate assurance from the technical team, so the overall efficiency declined. It was recognized that financial statements have some reliable issues. Cash flows statements also failed to state the actual revenue from the S1A, S1B and S1C version. So, it can be easily analyzed that auditing process failed to find the fact behind these misstatements.

Adam Cranston, son of Michael Cranston, who is a deputy tax commissioner, was arrested because of an alleged tax fraud of $165 million. However, Michael Cranston have also been charged for abusing his position being a public official, the tax officials opine that that they believe Michael to be unaware regarding the alleged conspiracy as he played a significant role in the high profile fraud investigations, including Operation Wickenby and release of Panama papers. It was considered to be as the biggest white collar fraud case in the history of Australia. As per the report of the Australian Federal Police, the company was alleged for drawing off $165 million in tax and using it for lavishly purposes. The case has been resulted in a series of arrests along with son and daughter of Michael, and the abduction of number of luxury goods, together with sports cars and light planes. Later on, Plutus was described by the police as a “legitimate payroll company”, but being operated by the members of the alleged crime syndicate (Khadem, 2017).

How Fraud was Committed

The whole case is like that Plutus accepted money from legitimate clients to process the payroll on their behalf. The company transferred the money to seven sub-contracted Tier 2 companies, which then made payroll payments to individual workers of the clients. The directors of these companies were recruited to likely to operate the companies, but in actual, they knew nothing about the operations. There was found to be the effective control of the crime syndicate members. These Tier 2 companies were required to submit Pay As You Go (PAYG) tax payments for maintenance to the ATO for their clients, as their contractual obligation towards the legitimate payroll of the clients of the company. However, it was investigated that the companies paid only a part of their tax obligations to the ATO, and the remaining was drawn off by the syndicate members and channeled through various companies and trusts for their personal benefits. Plutus Payroll was well known among the IT contractors and they all went into trouble due to no payment to thousands of workers, when the accounts of the company were frozen by the ATO (Buckingham-Jones, 2017). The technology workers complained of their missing payments managed by Plutus at the Whirlpool forums, and their lack of response as well.

Later on, the website for Plutus Payroll Australia had removed all the content, replaced by a single message remaining that the company has suspended its business because of commercial dispute (Evans, 2017). However, the company released a mail that ATO had agreed to allow the release of wages owed to the contractors. SYNEP, a private equity firm which bought Plutus in 2016 but the page on its website for its portfolio was also found to be empty, however, the investment by the SYNEP in Plutus is there on webarchive.org.

The case of fraud has been concentrated over a company named Plutus, which helps large companies in paying the contractors. Adam Cranston, who was arrested for fraud, was a director and secretary of SYNEP, the company which is the owner of Plutus. As per the IT contractor of the Plutus, residing in Canberra, he got an email by the company that they have suspended their operations due to their commercial dispute, which had prevented them from making payments. According to him, after few days, Plutus approved their issue to all their contractors in a detailed manner saying that their dispute was with Australian Taxation Office, who supposes that the company owe them money. Due to this reason, ATO acted in an unfair manner and froze their bank accounts without providing them with a warning or without any consultation with them. Moreover, the company denied of the claim by ATO and stating its tax compliance, objected in the courts. While the company was investigated by Senator Cameron, he found that hundreds of federal police officials were involved (Pash, 2017). Furthermore, he found that contractors had been employed by the contracting firms and agencies, which were then contracted out to the government agencies, which were then paying through this company. Above it, the profiles of the registered directors seemed unusual, out of which, few of the directors had no qualifications as directors. Number of government agencies was involved such as ABC, the Department of Immigration and Border Security, NDIS, and Social Security, and Defense.

Evidence Obtained for Proving Fraud

Adam Cranston was arrested in Sydney due to the sting operation performed by Australian Federal Police (AFP) (Spencer, 2017). Michael Cranston, who was considered to be as unaware about the facts was opined by the police to be intertwined in the activities performed by others, has also been issued with a court notice for attendance. The investigation was described by the AFP as the most significant white-collar criminal investigation in the Australia considering the huge number of people and amount of cash that was involved (Olding, 2017). The police officials alleged that the criminal syndicate had the lavishly standard of living and had preoccupied the taxpayer funds for the purchase of jewellery, planes, property, sports cars, artwork and wines. In the form of evidence, the police officials had seized 25 motor vehicles, $15 million in bank accounts, 18 residential properties, 12 motorbikes, 2 aircrafts, and firearms, jewellery, unique artworks, vintage wines, and $1 million in a safe deposit box. In this way, so much of evidential materials were gathered by the police officials. As a result of all these seizures, nine people were arrested and charged (Daniel & Stuart, 2017).

In addition to it, in our opinion, the police officials should have taken the financial records of the company as well as of the persons involved in the fraud. The police officials should investigate upon the number of people or groups involved with this company and should investigate them as well, particularly, SYNEP. Furthermore, the workers owing money from the company should be paid immediately by the accounts of the culprits.

Steps to Finalize Case          

In compliance with the Accounting Professional & Ethical Standards (APES), under APES 215, which establishes standards for the members in terms of quality and ethical Forensic Accounting Services (FAS), should be read in combination with other professional duties of the members and the legal obligations that may possibly be applied. Taking into consideration the regulation, there are two steps that are required to be undertaken to finalize the case for the purpose of submission to a court of law. Firstly, the investigators should analyze the accounts of all the accused persons to investigate their credits and debits and the sources behind the amount of money transferred to their accounts. As the company is not fraudulent, but the criminal syndicate, the financial statements will make the details clear (Butler, 2017). Secondly, the value of the property and other materials seized by the police can provide an idea about the source of income of the persons involved and the purchases made by them, which will indicate the fraud committed by them. Therefore, the court will be able to recognize the matter taking into consideration all these facts.

Conclusion

From the understanding of key issues, fraud triangle framework and auditor’s role, it can be concluded that D-Merton is facing an issue of fraud by their own organizational structure, which affect its overall performance. The rating of their successful versions SA1, SA2 & SA3 became down due to these fraud activities. They are facing the issue of cyber security because of their doubtful defense system. Fraud triangle framework helps to understand the reasoning behind these criminal activities at the workplace. Its three main stages, Pressure, Opportunity & Rationalization explains the actual fact and helped to identify the issues. D-Merton is also facing the issue of financial misstatement due to the weak internal control and audit. As Auditor is the person who investigates the financial statement & identify the gap but here, auditors also failed to bring the transparency. 

After analyzing the case of Plutus, it can be concluded that the criminal syndicate within the company were involved in a fraud of $165 million and utilized the money in their lavishly lifestyle. Adam Cranston was one of the nine culprits, who were arrested by a sting conducted by the police and a large amount of cash; expensive items and property were seized by the police officials. The company owed a lot of payments of the workers, which was then allowed by the ATO to release. Tier 2 companies were involved in the fraud triangle; however, they deleted all the data related to the Plutus from their sites. Therefore, it can be recommended to the investigators that they should analyze the case deeply and should investigate the other companies involved before their final submission to the court.  

References

ACFE. (2017). The Fraud Triangle. Retrieved 2017, from acfe: https://www.acfe.com/fraud-triangle.aspx

AGA. (2017). The Fraud Triangle. Retrieved 2017, from AGA: https://www.agacgfm.org/Fraud-Prevention-Toolkit/Fraud-Awareness-Mitigation/Fraud-Triangle.aspx

Brumell Group. (2017, june). The Fraud Triangle Theory. Retrieved 2017, from brumell group: https://www.brumellgroup.com/news/the-fraud-triangle-theory/

Buckingham-Jones, S. (2017). Payroll fraud accused ‘overloaded’ by evidence, court told. Retrieved from theaustralian.com.au: https://www.theaustralian.com.au/business/payroll-fraud-accused-overloaded-by-evidence-court-told/news-story/ed43478d5bc8eeec31306140a4e2faa1

Butler, B. (2017). Plutus scam: Lawyers caught up in payroll fraud sting. Retrieved from theaustralian.com.au: https://www.theaustralian.com.au/business/plutus-scam-lawyers-caught-up-in-payroll-fraud-sting/news-story/22f9df1654d0988b22e24ddf33d94504

CLM. (2017). The Fraud Triangle Theory. Retrieved 2017, from CLM: https://clmmag.theclm.org/home/article/Insurance-fraud-triangle-theory

CSO. (2017). CSO. Retrieved 2017, from Fraud prevention: Improving internal controls: https://www.csoonline.com/article/2127917/fraud/fraud-prevention-fraud-prevention-improving-internal-controls.html

Daniel, S., & Stuart, R. (2017). ATO fraud case: How did the investigation into the alleged $165m theft unfold? Retrieved from abc.net.au: https://www.abc.net.au/news/2017-05-18/how-the-afp-investigation-into-ato-fraud-unfolded/8536784

Evans, M. (2017). How the alleged $165 million tax scam worked. Retrieved from smh.com.au: https://www.smh.com.au/national/how-the-alleged-165-million-tax-scam-worked-20170518-gw7wuz.html

(2011). The Fraud watch. Retrieved 2017, from EY: https://www.ey.com/in/en/services/assurance/fraud-investigation---dispute-services/fraud-watch---viewpoint

GRFCA. (2017). Gelman Rosenberg Freedman. Retrieved 2017, from What an Auditor Does and Doesn’t Do: https://www.grfcpa.com/resources/publications/auditor-responsibilities/

HRZone. (2017). What is the Fraud Triangle? Retrieved 2017, from hrzone: https://www.hrzone.com/hr-glossary/what-is-the-fraud-triangle

Khadem, N. (2017). ATO to work with Plutus clients at centre of alleged tax fraud. Retrieved from nvi.com.au: https://www.nvi.com.au/story/4694352/ato-to-work-with-plutus-clients-at-centre-of-alleged-tax-fraud/?cs=9

Olding, R. (2017). How an alleged $165m tax fraud syndicate unravelled. Retrieved from theland.com.au: https://www.theland.com.au/story/4672810/how-an-alleged-165m-tax-fraud-syndicate-unravelled/?cs=7

Pash, C. (2017). What we know about Plutus Payroll, the company allegedly at the centre of Australia's biggest tax fraud. Retrieved from businessinsider.com.au: https://www.businessinsider.com.au/what-we-know-about-plutus-payroll-the-company-allegedly-at-the-centre-of-australias-biggest-white-collar-fraud-case-2017-5

Spencer, L. (2017). Plutus Payroll enters administration after $165M tax fraud investigation. Retrieved from arnnet.com.au: https://www.arnnet.com.au/article/620426/plutus-payroll-enters-administration-after-165m-tax-fraud-investigation/