FTI: Financial Statement Frauds - Chinese-Style (Presentation)

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Association of Certified Fraud Examiners
Catherine Williams, Senior Managing Director
Forensic Accounting and Advisory Ser...

Financial Statement Fraud – Chinese style

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What Do These Companies All Have In Common?

 Heightened public concerns over corporate fraud
 Recent wave of accounting scandals in China and Hong Kong
 Increased ...

Reverse Mergers (U.S. & Canada)
Reverse Mergers (U.S. & Canada)
Reverse Mergers (U.S. & Canada)
Reverse Mergers (U.S. and ...

Reverse Mergers (U.S. & Canada)
Reverse Mergers (U.S. & Canada)
Reverse Mergers (U.S. & Canada)
Red Chips (Hong Kong)
Real...

Reverse Mergers (U.S. & Canada)
Reverse Mergers (U.S. & Canada)
Reverse Mergers (U.S. & Canada)
Listing Fraud
Hontex (HKSE...

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COSO in the Fraudulent Financial Reporting 1987–1997
 Generally involved multiple fiscal periods
 Companies were g...

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COSO Fraudulent Financial Reporting: 1998–2007
 Average fraud period extended 31.4 months
 The size of companies i...

6.5
49.7
79.6
0 20 40 60 80 100
Financial Statement Fraud
Corruption
Asset Misappropriation
Percentage of Cases
TypeofFrau...

200,000
460,000
4,300,000
0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000
Asset Misapproiation
Corruption
Financial St...

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Source: ACFE 2010 Report to the Nations (Asia Pacific Edition)
Percentage of Total Reported Dollar Losses
Financial...

Regulatory bodies in the PRC
 Ministry of Finance (MOF)
 Accounting Standards for Business Enterprises (ASBE)—38 standar...

Regulatory bodies in the PRC - SAT
 Input VAT is payable at the point of raising an
invoice
 Output VAT is credited on o...

Example – Manipulating goods delivery
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Company A delivers
goods to Company B
All documents are
included except the
V...

Example – manipulating consignment goods
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Company A & B agree to
issue sales invoices on a
“consumption” basis
Compa...

Chops
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Company Chop
Contract Chop
Financial Chop
HR Chop
Legal Representative Chop
Invoice Chop (New)
(“Fapiao”)

Case Study
Moulin Global Eyecare Holdings Limited (In Liquidation)

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Financial Statement Fraud – Moulin
“Police raids net five in Moulin fraud case;
company founder, son and three othe...

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Case references
 Active Base Limited v Roderick John Sutton & Other HCCW 470 of 2005
 Moulin Global Eyecare Holdi...

− 21 −
Financial Statement Fraud – Moulin
 Listed on the HKSE October 1993
 Suspension from trading on April 18, 2005
fo...

− 22 −
Delivering Documents – Hong Kong style
Financial Statement Fraud – Moulin

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Document Recovery
Financial Statement Fraud – Moulin

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Document Storage – Hong Kong style
 A secret room in the treasurer’s office…………….
Financial Statement Fraud – Moul...

Draft Balance Sheet as at December 31, 2004
Assets
 Cash at Bank – HK$1.2 billion (US$154 million)
– Including HK$310 mil...

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Locating Assets – in China
The PRC Credit Union where funds of HK$80 million were said to be deposited.
Financial S...

− 27 −
False Bank Documents
Financial Statement Fraud – Moulin

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False Bank Documents
Financial Statement Fraud – Moulin

Draft Balance Sheet as at 31 December 2004
Assets
 Cash at Bank – HK$1.2 billion
– Including HK$265 million in the PRC
 ...

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Locating Overseas Assets – Trade debtors
Financial Statement Fraud – Moulin

Draft Balance Sheet as at December 31, 2004
Assets
 Cash at Bank – HK$1.2 billion
– Including HK$265 million in the PRC
...

Draft Balance Sheet as at December 31, 2004
Assets
 Cash at Bank – HK$1.2 billion
– Including HK$265 million in the PRC
...

Draft Balance Sheet as at December 31, 2004
Assets
 Cash at Bank – HK$1.2 billion
– Including HK$265 million in the PRC
...

Easy to obtain – not a lot of credit checks
Competitive market for the banks – high volume, short term
Suppliers and custo...

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Financial Statement Fraud – Moulin
Trade Finance Fraud

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Trade Finance Fraud
Financial Statement Fraud – Moulin

Earnings that have been artificially inflated will not provide operating
cash flow for the company
Increase in assets – in...

Ratio Analysis
Net working capital ÷ Total sales
Moulin’s working capital to sales Dec 31, 2003
Financial Statement Fraud ...

Financial Statement Fraud – Moulin
Benford’s Law
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The law says that the number 1 will appear as the first digit abou...

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Data Analytics
Financial Statement Fraud – Moulin

Case Study - Moulin
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Leadkeen Beijing Trial Balance
Includes “fake” accounting ledgers for Custom tax and Packing
ma...

Red Flags and Warning Signs

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Warning Signs
 Corporate governance issues – family hold key positions, weak independence
 Significant, unusual, ...

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Warning Signs
 Working capital blowout – disparity between reported earnings and free cash flow
 Gross profit mar...

45
Warning Signs

Warning Signs
Company Listing Date High Sales over
Assets
High Cash High
Working
Capital
Frequent
Corporate
Activity
Direc...

Financial Statement Fraud
“if we paid all the royalties we are supposed to, we would never make any money.”
– Manager of f...

QUESTIONS?

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