Tag Archives: fraud

NCI, Inc. Reports $18 Million Embezzlement by Corporate Controller

embezzlement

Last week, NCI, Inc. reported that it fell victim to $18 million of embezzlement by its corporate controller. Read the Company’s Press Release here.

NCI is a Northern Virginia-based provider of enterprise solutions and services to U.S. defense, intelligence, health, and civilian government agencies. The controller reportedly embezzled $5 million in 2016, and $13 million over the previous five years. According to the Company’s preliminary findings, the misappropriations were reflected as expenses in the Company’s financial statements. Accordingly, NCI has concluded that the un-audited interim financial statements for the nine-month period ending September 30, 2016, contain material errors related to the theft in that period and therefore should not be relied upon by investors. The misappropriations were also treated as allowable indirect costs on its government contracts. How the Company will be obligated to reimburse the government for any such costs paid to it in the course of its government contracts[1] remains unclear. The Company has stated that it expects to recover a “large portion” of the funds from the former controller and through insurance coverage.

Though the fraud at NCI is considerably large, embezzlement by corporate insiders, particularly accounting personnel, is not uncommon. According to a study by the Association of Certified Fraud Examiners (ACFE) in 2016, companies typically lose an estimated 5% of their revenues to fraud. Moreover, nearly 17% of the frauds reported in that study were perpetrated by accounting personnel – more than any other department.

To learn more about Aronson’s fraud investigation capabilities, or if you feel that your company may be the victim of a fraud, please contact Michael Kresslein at 240.364.2612 or Bill Foote at 301.231.6299.

[1] According to NCI’s most recent 10-Q filing, for the nine-month period ended September 30, 2016, cost-plus fee contracts represented 60% of total revenue.

Phone Scams: IRS Impersonator Sent to Jail

Millions of Americans have been on the receiving end of telephone callers falsely claiming to be from the IRS. Enough people have fallen for this scam over time to make this a lucrative business for the scammers.

At last, one such scammer, Sahil Patel, was sent to prison for 175 months and forced to disgorge $1 million of ill-gotten gains since his arrest back in December 2013. Patel was arrested for his participation in organizing the U.S. side of a fraud ring that used call centers in India to contact American citizens. The calling tactics were fairly sophisticated, even misusing calling services to make the Caller ID display phone numbers coming from the FBI or other federal agencies.

Unfortunately, Patel is but one of many scammers and his arrest barely makes a dent in the rampant and brazen criminal activity we are seeing. The callers are doing their homework – they know enough about the person to make the story believable. TIGTA, the agency overseeing IRS activities, still receives up to 12,000 complaints per week about these calls.

If you receive a phone call claiming you owe money to the IRS, do not answer any of the caller’s questions under any circumstances, no matter how convincing they sound. Instead, ask for the person’s name, ID, and their contact number. If the person immediately hangs up, you can be sure it is as scam. If unsure, contact your tax advisor or call the IRS at 800.829.1040, so your account can be reviewed to be sure there are no issues.

For further information or to discuss your specific situation, please contact Larry Rubin, CPA, Aronson’s tax controversy practice lead, at 301.222.8212.

Owner of Construction Contractor Guilty of Payroll Fraud

The owner of Over Rock Construction LLC, a NY construction service company, pleaded guilty to a fraud conspiracy charge and to a tax violation in connection with a scheme to defraud the New York Power Authority (NYPA). As described in a Department of Justice press release, the charges stemmed from an ongoing joint federal and state investigation into bid rigging and fraud in regards to the award of contracts at the NYPA facility in White Plains. Over Rock was awarded a $3 million contract with NYPA in October 2009 to perform landscaping, snow removal, and masonry work. Throughout the course of the contract Over Rock’s owner participated in a fraudulent scheme that involved submitting fraudulent certified payroll statements and invoices for reimbursement for “no show employees”— individuals who performed no services. In total these fraudulent charges approximated $400,000.

Unfortunately, payroll fraud is not an uncommon occurrence in the construction industry. As evidenced by this case, such fraudulent activity often overlaps into other fraudulent activity such as filing false tax returns. New York State Inspector General Catherine Leahy Scott explained, “This contractor defrauded the State on multiple occasions, repeatedly billing the New York Power Authority for workers who never showed up and by paying significantly less taxes than he owed.”

As part of our Forensic & Valuation Services practice, Aronson LLC helps clients investigate financial statement misstatements and asset misappropriation schemes. To learn more about how our team of Certified Fraud Examiners can assist your organization, contact Bill Foote at 301.231.6299.

CFO Penalized for Software Company’s Timesheet Falsification Fraud

Financial statement fraud schemes commonly take the form of overstated revenue. That was indeed the case in a recent SEC investigation into the falsification of time records by certain professional services employees of Saba Software, a provider of cloud-based intelligent talent management solutions that had its IPO in 2000.[1]  According to the SEC, “[t]he improper time-reporting practices enabled Saba Software to achieve its quarterly revenue and margin targets by improperly accelerating and misstating virtually all of its professional services revenue during a four-year period as well as a substantial portion of its license revenue.”

For the applicable time periods, Saba reported annual revenue in the $100M to $120M range. As a result of the time record falsification scheme, revenue was overstated by at least 5% annually, resulting in a cumulative $70M overstatement of pre-tax earnings. From a GAAP perspective, Saba’s improper time-keeping practices precluded it from demonstrating VSOE and therefore required recognition of professional services revenues on a completed contract basis. In short, Saba recognized revenue earlier than it should have, which caused operating results to be materially misstated.

Although there was no indication that the company’s CFO was involved in the scheme, the SEC applied the “clawback” provision of Section 304 of the Sarbanes-Oxley Act of 2002, ordering that nearly $500,000 be reimbursed to Saba for stock-sale profits and bonuses.[2] Separately, a former CEO also agreed to a similar “clawback” of $2.5 million last September, and Saba itself received a $1.75 million financial penalty in connection with the fraudulent accounting scheme.

As this SEC investigation illustrates, emerging and later-stage companies in the technology sector should be on the lookout for improper billing and revenue recognition practices, including premature and/or accelerated revenue recognition. As part of our Forensic & Valuation Services practice, Aronson LLC helps clients investigate financial statement misstatements and asset misappropriation schemes. To learn more about how our team of Certified Fraud Examiners can assist your organization, contact Bill Foote at 301.231.6299.

 


 

[1] A publicly traded firm until recently, Saba was taken private last month and is now owned by a San Francisco based private equity group.

[2] See SEC Order dated 2/10/2015 at http://www.sec.gov/litigation/admin/2015/34-74240.pdf. During the applicable time periods Saba actually employed two different CFOs; the $500,000 is a combined figure.

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