FSS performed data analytics of the QuickBooks records which revealed the accounts receivable records had been manipulated.
SITUATION: When a national accounting firm was sued for its failure to follow generally accepted auditing standards which would have uncovered a scheme that duped the bankers and the purchaser of a small manufacturing company, FSS was hired to investigate the allegations and testify before an arbitration panel.
A private equity fund made a stock purchase for 100% interest in a small manufacturing company in a fragmented industry. The goal was to grow the business, buy similarly situated companies and sell stock in a public offering or make an outright sale to a larger private equity group. A national accounting firm performed due diligence on the manufacturing company and with CPA assurances and a clean audit opinion, the purchase was consummated. Unfortunately within just two months of closing the private equity group determined that over one-half the accounts receivable were bogus and uncollectible.
STRATEGY: FSS accounting and auditing experts reviewed the manufacturing company’s financial records and detailed QuickBooks accounting system data. FSS data analytics of the QuickBooks records quickly revealed the accounts receivable records had been manipulated. Further investigation by FSS demonstrated the accounting records were not sufficiently tested, else the fraudulent scheme would have been uncovered by the external auditors. FSS accounting and auditing experts reviewed auditor workpapers and records and effectively presented to an arbitration panel through demonstrative exhibits and expert testimony how neither proper work procedures nor proper planning were conducted by the auditors.
RESULTS: FSS accounting and auditing experts were able to show to an arbitration panel:
- External auditors failed to follow their required standard of care.
- External auditors failed to follow generally accepted auditing standards.
- The external auditors’ failures rose to the level of gross negligence.
- The external auditors’ failures caused (causation) losses to the private equity group.
- Private Equity group suffered over $3 million in economic damages.