Internal audit department guided through ethics hotline investigations

Our client’s need

A number of multi-national companies recently combined and went through the initial public offering process. As part of this process, the company implemented an ethics hotline, something that the individual companies did not have prior to their combination. Shortly after management communicated the availability of the ethics hotline, the newly formed public company received a number of anonymous reports on related party transactions, financial statement misrepresentation, earnings management, and inventory theft for several locations in the United States as well as one location in China. As a public company in the United States, each of these reports were required to be investigated to determine the accuracy of the allegations.

Baker Tilly solution

Baker Tilly guided the company’s Internal Audit department through the investigation process. For each report to the ethics hotline, Baker Tilly developed a customized work plan that focused on the allegations contained in the hotline reports. Activities performed included:

• Ratio analyses of the specific financial statement accounts at issue;
• Detailed analyses of the supporting documents for the accounting entries at issue;
• In-depth vendor and employee analyses to identify related party vendors, fictitious vendors, and other possible vendor schemes;
• Expense report analyses to identify any irregular activity;
• On-site fieldwork in the United States and China to investigate the issues first hand;
• Background checks of employees referenced in the hotline reports;
• Interviews of personnel central to the issues raised in the hotline reports. Interviews focused on the allegations, contained in the hotline report and the findings of the detailed financial analyses;
• Interviews with key management and operations personnel to determine if the culture supported accurate reporting regardless of the outcome (i.e., Tone at the Top);
• E-mail reviews of personnel to identify conversations related to earnings management, theft, related party transactions, and financial statement misrepresentation; and
• Report preparation to share findings with internal audit, the external auditors, and the company’s audit committee.

Results achieved

Baker Tilly confirmed that one location of the company had issues with related party transactions and possible earnings management. As a result of in-depth interviews and analyses, the Controller of the location investigated was terminated. The Plant Manager resigned prior to being terminated. Baker Tilly’s investigation concluded that the related party transactions and possible earnings management were not significant to the overall financial statements of the consolidated company.

Additionally, the client is now better prepared for their Sarbanes Oxley testing in the upcoming year as they are aware of current internal control weaknesses and deficiencies. This will allow the company adequate time to address the issues identified and avoid additional costs and testing in the upcoming testing period.

At the end of the project, the client reached out to Baker Tilly with the following feedback, “I thought [the Baker Tilly] team did an excellent job under tight deadlines. I would have no problem using them again in the future.”

For more information on this topic, or to learn how Baker Tilly forensic investigation specialists can help, contact our team.