The Phantom Audit
One of the Big 4 accounting firms, we’ll call D&E, audited the books of Stogie and gave them a clean opinion, stating that the financial statements were fair – they fairly represented the financial position and results of operations of Stogie.
Nothing could have been further from the truth. Almost all of the revenues, as well as the accounts receivable, were bogus. They were created out of thin air. Hundreds of sham companies were established all around the world to create sham purchases of metal, which were used as a basis for loans from banks. The bank loans were “recycled” – used to repay prior loans, as well as finance the lavish lifestyle of the fraudsters.
Gold Bank sued D&E claiming that its audit of Stogie was so grossly negligent that to claim it was an audit was a fraud on the Bank; and if D&E had performed appropriately, the lack of revenues and accounts receivable would have been disclosed and the Bank would not have loaned Stogie any money.
We obtained D&E’s workpapers and concluded that very little audit work was actually performed; and that of the work that was performed, most was significantly deficient. The red flags persistent throughout D&E’s audit files were astounding. Had anyone at D&E – anyone with any experience and expertise – actually reviewed the audit file prior to release of Stogie’s financial statements, the inconsistencies, the anomalies and the errors would surely have been uncovered.
For example, auditors are required to confirm the accuracy of accounts receivable – amounts due from customers. Stogie’s customers were fictitious. They were sham companies with fake addresses, fake phone numbers and fake employees, created to provide the appearance of being real buyers and sellers of metal. When D&E sent correspondence to confirm the existence and amounts of the accounts receivable reported on D&E’s books, the return responses were faxed back to D&E. The faxes confirmed the accuracy of the amounts reported by Stogie; however, the faxes for hundreds of companies identified by the fax header at the top of the fax page indicated that all were sent from the same fax number! This critical fact, indicating a strong common controlling relationship among supposedly unaffiliated customers, if disclosed, would have blown the lid off this massive fraud, was completely ignored.
Our report was bullet proof. We disclosed the numerous red flags that highlighted the significant wrongdoing by Stogie; and highlighted the significant negligence of D&E. It was clear that had D&E followed up on any one of the red flags the Ponzi scheme would have come to an end. Our report provided Gold Bank with the ammunition it needed to hold D&E accountable and recover their losses.
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