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ARXIS - Litigation Consulting
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August 2019

Recent Case:

Culture Matters - Proving Fraud in a Silo

Summary of Issue:

Sometimes the system of internal controls is so bad or non-existent that fraud cannot be proven, or the loss quantified. We were recently retained to do a fraud examination for an off-site division of a very large business. Corporate management was new, and they had begun the work of reshaping operations and clearing out problems within all the divisions of the company. Management described several indications that there were serious problems within this particular division and they did not want to use the outside audit firm to examine those concerns. They alleged that company policies and procedures were not being followed, that company assets were being misappropriated, and there was an unusual and detrimental relationship with a significant vendor. This is a very common scenario and we followed the usual protocol.

Arxis' work:

The first phase of the engagement was to get documents and figure out a scope and sequence of work, the time period to be examined, and the form of reporting to our client. As is typical, we saw quickly that management had very good reason for concern, and the direction and method of the examination was quickly determined.

Problems and hindrances developed once we started the second phase of the work. First, this division of the company had long ago isolated itself from the rest of the company. It had become a self-contained silo within the larger company. Management had adopted accounting and process software different from the rest of the company. A culture had developed where information was not shared with the rest of the company and employees had a fierce loyalty to division management and each other. It turned out some or most of that loyalty was driven by fear of the division president. The ability to conduct a review without raising undue notice or alarms was virtually impossible. None of the staff was made available for interviews to determine policies and procedures within the division.

It was also apparent that the culture had existed so long that the centralized systems designed to maintain and monitor internal controls within the division had long ago been intimidated so completely that the division was avoided and ignored. Auditors avoided the division president and his team. Essentially, there was no audit of the division and it was probably justified as being immaterial. Internal audit and the accounting staff of the company simply avoided contact with the division because it was so unpleasant and non-productive. Requests for information were ignored or delayed to such an extent that people gave up. We saw this first-hand in the course of our work.


The result was a completely different set of accounting policies and procedures in the division than existed in the rest of the company. We never could determine what those were and/or whether they were being followed. Evidence was developed supporting the suspicion that assets were being misappropriated, there likely was a kickback scheme with a significant vendor, and that the company's policies and procedures had been ignored, modified, and overridden. However, because of the communication lockdown within the division and the lack of data we could not "prove" it.

Not all of our engagements culminate with a complete and final solution; some end as a series of recommendations for the next phase of assessment and problem resolution. In this case, if there were crimes committed it was likely one, or a few, individuals were involved. Internal controls and a fraud examination can identify those individuals and exonerate others. We left that engagement having issued a long list of observations about the lack of controls and reasonable business practices along with recommendations for fixing the situation. Unfortunately, we also left the company having not completed the process of identifying the responsible people or quantifying the loss in a definitive way, due to the lack of controls and documentation. Consequently, we were forced to leave behind a dark cloud over a large group of people - some of whom would have been well served by a solid and functional system of internal controls.

Service Profile:

Forensic Accounting Services for Embezzlement and Fraud

Increasingly, businesses are being victimized by embezzlement and fraud, which are serious and costly crimes. Arxis Financial's forensic and fraud accountants assist in determining the extent of monetary loss or damages and who committed the fraud.

A detailed fraud examination can uncover a dizzying maze of transactions, documents and stonewalling. Forensic experts use a variety of techniques to detect fraud and trace misappropriated cash. By scouring the company's financial ledgers and supporting documents, a Certified Fraud Examiner can help unravel the web of fraudulent transactions. For example, the investigator may review or reconcile the company's bank accounts, identify payees, track electronic transfers and payments through the company's general ledger, and scrutinize documents supporting check disbursement, such as vendor invoices and expense authorizations.

Our forensic and fraud accountants serve a critical role in both plaintiff and defense matters. We have extensive experience in determining the necessary documentation, discovery approaches, and management of these documents. We then evaluate, analyze, summarize, and present the evidence. In conjunction with Arxis Financial's experts, the attorney can assess whether fraud occurred, the legal and financial viability of the case, and the best litigation strategy.

If you have any questions about Forensic Accounting Services for Embezzlement and Fraud, please feel free to contact us.


Upcoming Speaking Engagements for Chris Hamilton

Chris Hamilton's upcoming presentations include:


  • "Valuation Techniques and Theories," presented to NACVA, Atlanta
  • "Income and Asset Approaches to Valuation ," presented to NACVA, Atlanta

If you are interested in asking Mr. Hamilton to speak at your organization's upcoming meeting, please feel free to contact him.

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Chris Hamilton, CPA, CFE, CVA
Chris Hamilton, CPA, CFE, CVA
(805) 342-0749
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