Expert Discovery, a fraud software and solution company based in Moscow, recently launched its Manufacturing Forensics anti-fraud software and analytics solution.
By Sofia Ievenko, PhD, MBA, CFE
Managing partner at Expert Discovery
The shareholders of the automobile factory Autocaroff grew concerned after operating costs rose substantially without an increase in production or price of materials, market disruption, or other apparent reason to explain why costs had risen sharply.
Could fraud be responsible? Was someone inside or outside of the organization stealing materials and other assets?
An audit of the Autocaroff factory’s in-house security procedures, including reviewing surveillance video and transport log entries, showed that for at least six months, security employees at the factory gate checkpoints had systematically ignored their duties to register all vehicles entering the property.
Mr. Steelmaker, Autocaroff’s majority stakeholder, initiated an independent investigation to detect possible fraud schemes that could lead to the loss of revenue.
Mr. Steelmaker defined the area for investigation within the limits of three factory floors: (1) the welding department, (2) the extrusion plant, and (3) the frame shop.
His fraud investigators discovered, revenue was down 17 percent over the previous five years because of various schemes, including the cooking of inventory books.
Based on the findings of forensic diagnostics, the company filed charges against the people involved.
The perpetrators were charged under Article 159, part 4 of the Criminal Code of the Russian Federation. The criminal investigation continues.
Corporate fraud vs. investment attractiveness
Organized fraud has become ever more common due to a continuing “perfect storm” in the Russian economy that fosters such crimes.
Unpredictable oil prices, decreased exchange value of the ruble, deterioration in the reliability in the banking sector, and the growth of the grey economy – all add up to a rise in corporate fraud.
Unfortunately, employees and contractors have become increasingly unpredictable, seeking short-term gains rather than mutually beneficial and transparent cooperation that benefits employers.
Business owners underestimate the damage from abusive acts of employees, business partners and customers. Shareholders and top managers are shocked to learn how far the revenue loss goes.
Furthermore, it helps to remember that fraud’s most severe consequence is the loss of investment attractiveness.
Fraud reduces profit; therefore less profit attracts fewer investors. Indeed, according to Russian State Statistics Service, in 2015, investment fell to 8.4 percent, the lowest in three years. ‘
Enter, Expert Discovery
Expert Discovery is a partnership of forensic experts, lawyers, attorneys, mathematicians and fraud detectives.
Expert Discovery’s new software is designed to catch fraud in each department within an organization as well as track contractor activity to ensure outsiders don’t steal from companies, either.
Expert Discovery’s new forensics product for manufacturers is called “Manufacturing Forensics.”
In addition to traditional approaches and instruments that are used to implement fraud management, the Expert Discovery team applies the following forensic methods:
- Customized FDA (Forensic Data Analytics) tests;
- Affiliation analysis of employees and contractors (including social media analysis);
- Computer forensics analytics, including analysis of integration and access rights for various databases.
Examples of fraud discovered by Expert Discovery Team
A chief fraud method is to stockpile un-inventoried finished products and excessive raw materials, intermediate products and other materials – including spare parts, assembly components, fuel and lubricants – without the company’s knowledge.
They are then sold on the black or grey market. Fraudsters can cook the inventory books and perpetrate fraud in the manufacturing zone in several ways:
- manipulations with operating standards and wastage and rejection rates;
- misrepresentation of instrument data and/or intentional damage of monitoring and measuring devices including video surveillance devices;
- misrepresentation of inventory control data and/or production records data;
- insufficient specification/lack of specification in the documents confirming the write-off of raw materials, intermediate and/or flaw products;
- intentional misdirection in stated planning.
In the procurement zone:
- Biased selection of suppliers against the interests of the owner
- through making contracts with companies affiliated with the responsible executives and through various tender manipulations:
- procurement of products and raw materials that do not meet the quality standards established either by owner or by law;
- overpriced purchases;
- fictitious, double and/or excessive purchases.
Also In the procurement zone, fraudsters create advantages that hurt the owner’s interests with suppliers and contractors, including:
- unfounded prepayment of contractors’ supplies/operations/services, even in case of non-fulfillment of required conditions;
- intended prepayment of supplies/operations/services for the following acknowledgement of creditor indebtedness/uncollectables.
In the sales zone:
- Intended (unreasonable) discounts and bonuses, granted to purchasers and customers, that are inconsistent inter alia with accepted practice of low-margin products sales or high season sales and/or systematically contradict with corresponding contractual conditions.
- Intended delay in payment granted to purchasers and customers.
- Unfounded write-off of bad debts of purchasers and customers, including their fraudulent/premeditated bankruptcy.
In the personnel and non-production expenses zone:
- Unfounded bonus and premium payments by distorting actual key performance indicators (KPI).
- Salary payments to ghost employees
- Intentional overstatement of installation and construction expenses and/or repair expenses.
- Investment activities that intentionally discriminate against the owner’s interests, including lending and securities trading.
- Conclusion of leasing contracts, sponsorship and charity agreements, property and employee insurance contracts, under terms against the owner’s interests in the presence of more profitable market contracts or agreements.
For more information, contact Sofia Ievenko at +7 495-960-4309.
Visit the Expert Discovery website at www.era-forensic.com