Case studies in due diligence Ian Robinson Director, Robinson - PowerPoint PPT Presentation

R OBINSON M ANAGEMENT L IMITED  Case studies in due diligence Ian Robinson – Director, Robinson Management

R OBINSON M ANAGEMENT L IMITED Due diligence Agenda  1. Introductions  2. About Robinson Management  3. Common schemes  4. Case studies in due diligence

R OBINSON M ANAGEMENT L IMITED About Robinson Management  Robinson Management (RM) is a forensic accounting firm. The company assists the legal profession with cases involving fraud, valuation, mediation, corporate advisory, governance, dispute resolution, due diligence, restructuring, recovery, and liquidation.  With expertise in these areas, RM are specialists in Hong Kong with a global reach

Due diligence - when and why?  Types of assignments  What should due diligence cover?  Problems

R OBINSON M ANAGEMENT L IMITED Due diligence is a popular topic…

R OBINSON M ANAGEMENT L IMITED Due diligence is a popular topic…

R OBINSON M ANAGEMENT L IMITED Due diligence - common schemes found Overwhelming majority of frauds overstate revenues. Sales targets and performance-based incentive plans add pressure to management to engage in:  Channel stuffing  Premature revenue recognition  Overstating cash balances

R OBINSON M ANAGEMENT L IMITED Due diligence - common schemes found  Multiple sets of books  Off balance sheet liabilities  Fictitious customers  Round-tripping

R OBINSON M ANAGEMENT L IMITED Consequences of poor due diligence  Fraudulent financial reporting  Misappropriation of assets  Tax evasion  SEC sanctions, violations of FCPA  Criminal convictions  Loss of funds and/or purchase of assets that don’t exist  Failure by auditors to conduct thorough due diligence has resulted in the barring of the auditor’s eligibility to sponsor exchange listings

Red flags raised during due diligence  Remote locations  Undue emphasis on reaching short-term targets  High commission structures  Autocratic line management  Low staff morale  High staff turnover  Suspect timing and amounts of sales

R OBINSON M ANAGEMENT L IMITED Red flags raised during due diligence Among other warning signs, the following are also commonly found during due diligence exercises in China:  Extensive engagement of middlemen in transaction cycles  Side arrangements or other price concessions to contracts  Unusual or unexpected relationships – between/within vendors, customers, directors, employees, family members

R OBINSON M ANAGEMENT L IMITED “It is nearly impossible to conduct significant business in China without participating in corruption.” Murong Xhuecun, New York Times (8 May 2012)  Case studies in due diligence

R OBINSON M ANAGEMENT L IMITED Due diligence: Case 1  US listed PRC company  Requires several different licenses to operate  How was the fraud discovered?  Tax bureau  Cash balances confirmed by company sponsored “actor” at a decoy local

R OBINSON M ANAGEMENT L IMITED Due diligence: Case 1  Series of subsequent investigations revealed  Non-existent assets  Inflated revenues  Reduced cost of sales  30 off-book accounts  Fake chops  Purchase terms

Due diligence: Case 2  Hontex  Chinese textile manufacturer preparing for HK listing in 2010  Sponsor fined 42mm RMB  Standard of due diligence work inadequate  Over reliance on issuers and failure to verify independently

Due diligence: Case 3  Investigation into the purchase of an Australian pig farm  Due diligence took place long after the purchase

R OBINSON M ANAGEMENT L IMITED Lessons learned  No two cases will ever be the same  no substitute for knowledge of the business  Investments should be made in installments and due diligence conducted as early as possible  Due diligence is the forensic accounting required before anyone becomes litigious

R OBINSON M ANAGEMENT L IMITED  Q&A