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

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Case studies in due diligence

Ian Robinson – Director, Robinson Management ROBINSON MANAGEMENT LIMITED

Due diligence Agenda

 1. Introductions  2. About Robinson Management  3. Common schemes  4. Case studies in due diligence

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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

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Due diligence - when and why?

 Types of assignments  What should due diligence cover?  Problems

Due diligence is a popular topic…

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Due diligence is a popular topic…

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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

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Due diligence - common schemes found

 Multiple sets of books  Off balance sheet liabilities  Fictitious customers  Round-tripping

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Consequences of poor due diligence

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Fraudulent financial reporting

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Misappropriation of assets

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Tax evasion

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SEC sanctions, violations of FCPA

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Criminal convictions

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Loss of funds and/or purchase of assets that don’t exist

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Failure by auditors to conduct thorough due diligence has resulted in the barring of the auditor’s eligibility to sponsor exchange listings

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Red flags raised during due diligence

 Remote locations  Undue emphasis on reaching short-term targets

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High commission structures  Autocratic line management  Low staff morale  High staff turnover  Suspect timing and amounts of sales

Red flags raised during due diligence

Among other warning signs, the following are also commonly found during due diligence exercises in China:

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Extensive engagement of middlemen in transaction cycles

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Side arrangements or other price concessions to contracts

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Unusual or unexpected relationships – between/within vendors, customers, directors, employees, family members

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Case studies in due diligence

ROBINSON MANAGEMENT LIMITED “It is nearly impossible to conduct significant business in China without participating in corruption.” Murong Xhuecun, New York Times (8 May 2012)

Due diligence: Case 1

 US listed PRC company  Requires several different licenses to operate  How was the fraud discovered?

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Tax bureau  Cash balances confirmed by company sponsored

“actor” at a decoy local

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Due diligence: Case 1

 Series of subsequent investigations revealed

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Non-existent assets

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Inflated revenues

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Reduced cost of sales

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30 off-book accounts

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Fake chops  Purchase terms

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Due diligence: Case 2

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Hontex

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Chinese textile manufacturer preparing for HK listing in 2010 

Sponsor fined 42mm RMB

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Standard of due diligence work inadequate

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Over reliance on issuers and failure to verify independently

Due diligence: Case 3

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Investigation into the purchase of an Australian pig farm

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Due diligence took place long after the purchase

Lessons learned

 No two cases will ever be the same

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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

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Q&A

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