This is a complex fraud and financial crime that has an element of collusion. The collusion is among individuals, Walt Palvo and his cohorts, within the organization. It is a fraud that involves a controller or sophisticated participant within the organization’s financial reporting structure. Palvo worked at MCI in the carrier’s financial unit and was one of a group of managers responsible for billing and collections for the carrier business segment. This is an organized crime and to a greater extent, a white collar crime, comprised of respected, business and professional men. These executive level individuals worked in concert (collusively) to override the system of internal ...view middle of the document...
How can seven MCI customers be defrauded over a six-month period, resulting in $ 6 million being funneled to the Cayman Islands? This will be impossible, if not highly remote, if there were checks and balances in the organizational structure.
Another weakness in the internal control was that there was no safeguards to the assets of the business and access to assets like cash and account receivables were free. Palvo virtually had the records under his control and because he helped create and developed the account receivable process, he was aware of the strengths and weaknesses and was able to manipulate the system. He uses the trick of “placeholder credits” by crediting accounts receivable even before receiving the cash. The fraud of earnings management was perpetrated by flouting the accounting policy which requires write-off of its receivables when bad debt percentage and account receivable collection period exceeded the targets set by MCI. To ensure that the fraud stays undetected and no red flags were highlighted, Palvo suppressed these increased expenses that would have adversely impacted earnings and earnings per share and hence MCI’s stock price. Accounts receivable that were going to be written off were converted to notes receivable and shown as an asset in the balance sheet. All these were done so that expenses related to the write off of the receivables would not hit the income statement; a very deceitful and fraudulent act.
There was also an internal control weakness of authorization which contributed to the commission of this fraud. Palvo executes deals with no knowledge by any authorized individual at MCI. He initiated and signed contracts/documents with outsiders (the factoring company and loan broker). In fact I realized there was supervision of Palvo. He teamed with loan broker and the factoring firm to concoct the scheme. This to me is seen as an organizational crime and came about because of the lack of supervision, execution and authorization; a weakness that existed at MCI.
2. Identify and justify the approach you would take if you suspected fraudulent activity within an organization where you work.
If a fraudulent activity is suspected within an organization where I work, the approach I would take is to react appropriately to systems and other early warning signals that include accounting anomalies, weak internal controls, analytical anomalies, lifestyles systems, tips from potential informants and behavior systems. A good anti-fraud environment requires constant awareness of these types of systems and, once observed or suspected quick reaction to ensure that any possible fraud is caught at the earliest possible moment. Eliminating fraud completely is virtually impossible, but we can be vigilant and react quickly by investigating the red flags that may indicate that fraud is taking place. My approach would be to know the exposure ( by brainstorming, performing risk assessment and audit planning), translate exposure into...