A senior member of Bite Communications' finance team is suspected of embezzling nearly $3 million from the company, its corporate parent disclosed today in a delayed annual report.
The executive was not named.
“I feel like we had a relative of Bernie Madoff working for us without us knowing,” CEO Tim Dyson told PRWeek. “We expect the case will take many months to work its way through the legal systems due in part to its complexity.”
Next Fifteen, the British PR agency holding company, disclosed in its annual report that the fraud was "an act of personal embezzlement by a long-serving employee in a trusted position heading up the finance team in the Bite office in San Francisco. This entailed a cheque fraud over a number of years, involving forging signatures and producing forged documentation. The weaknesses of controls that allowed this to happen were a lack of segregation of duties, management override of controls and inadequate review."
The FBI and SFPD are investigating. The Guardian previously noted:
Next Fifteen said that it has informed the FBI and is working with BDO, its external auditors, as well as hiring investigations firm Kroll to carry out a full forensic investigation of all the activities within this part of the business.
There has been a recent management shuffle at the company, but none of the executives named publicly to new positions are believed to be involved, according to PRWeek. Bite also lost its HP account, according to O'Dwyer's.
Here are all the details known publicly about the fraud, condensed and compiled from Next Fifteen's annual report. (Readers: if you know something about what happened at Bite, we'd love to hear from you.)
On 31 October 2012 we informed shareholders that, in the latter stages of finalising the audit, a fraud was discovered in the San Francisco office of Bite Communications. This has now been thoroughly investigated with the conclusion that this was an act of personal embezzlement by a long-standing member of the finance team in a trusted position. The required accounting adjustment has been to write off as an exceptional item $2.8m (£1.8m) (see note 4) relating to unrecoverable assets and unrecorded liabilities, reflecting cash stolen from the business. The fraud continued into the early part of the current financial year, which will require a further write-off of $0.2m (£0.1m). This crime is now being investigated by the FBI and the SFPD. All steps will be taken to recoup lost assets but it is too soon to estimate the likely scale of any recovery.
The Board is undertaking a comprehensive review of the internal financial controls environment, the details of which you can find in the Financial Review. Meanwhile, as indicated in the statement of 31 October, this regrettable event will not impact the operational performance of the Group or affect its ability to make the investments it has planned for the coming year.
As described in the Chairman’s Statement, the Group has suffered from an act of personal embezzlement by a long-serving employee in a trusted position heading up the finance team in the Bite office in San Francisco. This entailed a cheque fraud over a number of years, involving forging signatures and producing forged documentation. The weaknesses of controls that allowed this to happen were a lack of segregation of duties, management override of controls and inadequate review. Prior to 1 August 2010 the amounts were small and were expensed through the income statement, amounting to an identified total of $300k (£190k). As the amounts increased they were accumulated in the balance sheet, spread over two statutory entities. The total amount of cash taken is around $3m (£1.9m). We have identified that $200k (£127k) was taken after 31 July 2012 and will therefore be expensed in the current year. For the remaining $2.8m (£1.8m), the ongoing investigation has so far identified that around $1.4m (£0.9m) cash was extracted in 2012, and $1.4m (£0.9m) prior to 2012 ($0.7m (£0.4m) in 2011 and $0.7m (£0.4m) prior to 2011).
As at 31 July 2012, a total of $2.5m (£1.6m) was held on the balance sheet and represented by fictitious assets. Of that $2.5m (£1.6m), an amount of $1.1m (£0.7m) had existed at 31 July 2011. The Board have concluded that allocating the impact of the write off across each respective prior year would not make a material difference to an understanding of the accounts.
A further $0.3m (£190k) was identified relating to unrecorded tax liabilities and associated penalties and interest which have now been accrued. The write off and recognition of liabilities has resulted in a total charge associated with the fraud of $2.8m (£1.8m) being recognised in the 2012 income statement (see note 4).
In response to this fraud, the Board is undertaking a comprehensive review of the internal financial controls environment, including cash management involving both payments and receipts. A decision has been taken to create a dedicated Internal Audit function, with resources to be recruited in the US and UK.
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