Newsletter - June 2011

Welcome to the sixteenth edition of the Flint Forensics Pty Ltd semi-annual newsletter.  This newsletter is to help keep you informed of the latest developments or topical issues for further discussion and consideration. It is a free service provided by Flint Forensics Pty Ltd.

Index

• Customer Service - The Chinese Influence
• Emotional Intelligence
• Actual Case Investigated - Short Story "Love means different things to different people"
• Administration

Customer Service - The Chinese Influence

Australians are famous the world over as prolific travelers however it is becoming increasingly prevalent that we travel not just for pleasure but in pursuit of wider markets and to learn different ways of doing business in what as we integrate more and more as a player in a truly global economy.  My latest opportunity for travel overseas on business was to China where I attended the Canton Fair to learn firsthand of the fantastic opportunities there.

Held twice a year, the Canton Fair allows a wide array of domestic and international manufacturers around the world show their wares. I spoke to numerous company reps and their marketing people over the four day event and with a little organisation was able to actually visit some of their factories, inspecting their production processes and learning about their businesses in an effort to confirm under what terms we might be able to do business.  Of course I needed a little help to achieve this and to assist me in my pursuits I had an interpreter and driver to assist me.  Their help was beyond my expectation, provided as it was on behalf of the business interests I was looking to develop: they  organised everything for me, and wherever required they stepped in and assisted.  The interpreter was given a brief on my objectives and we worked together to achieve an outcome by liaising with the producers and wholesalers over the course of my visit.

The whole experience was exciting and productive and surprisingly personal - we worked, ate and socialised together and over the course of the trip we established a level of trust and mutual respect which are often at the very core of a productive working relationship.

And one thing which resonated strongly with me was the Customer Service that I experienced in China – it was beyond my expectation and reminded me of the level of customer service that used to be the norm in our own home here in Australia.  It sometimes seems that in Australia the concept of good customer service has been forgotten – and the benefits of creating that customer feel good factor that is so conducive to all good ongoing commercial relationships.

I used to be a scout. The ‘scout law’ is to be trusted, truthful and honest and is something that I was raised on as a young child, growing up in a small country community.  There was and there still are  people who want to test those core beliefs but reciprocal respect is always at the heart of business transactions and I believe that hasn’t changed from 20 or 30 years ago even though modern attitudes might have.  Nevertheless, what I encountered in China and the way I was treated was humbling and something that brought me back to business basics as part of a way of life.

Yes, it is true that in the life industry the participants are tested in many areas but in my opinion by behaving in a manner that you can be trusted, truthful and honest, show respect and include all  stakeholders in a transparent and open process then any business can grow sustainably.  And by stakeholders I mean to include administration, claims and sales officer, managers, directors, consultants, government, the customer and their representatives – after all we all have the shared  goal of purchasing products which are on the one hand financially affordable and on the other hand profitable to enable a sustainable industry. You will be tested, but my advice is stay to course and others will come around to your thinking and the all stakeholders will benefit. My view is everyone you meet or deal with is a potential customer and it is a common misconception that the customer is someone that you sell the product too.  A good friend and mentor told me once, What people remember the most is not the product or service provided, whether it be good or bad, but it was the way they were treated or the experience.

So my brief experience outside our own multi-cultural society was not only beneficial in a business sense but important in reminding me of old fashioned values and their place in the new world we live in.  I hope you like the above picture  - may all the new folks you meet be interesting and kind – just like you!!

Emotional Intelligence

In the new workplace, with its emphasis on flexibility, teams and a stronger customer orientation, this crucial set of emotional competencies is becoming increasingly essential for excellence in every job and in every part of the world. (1)

Emotional intelligence does not mean merely “being nice”.  At strategic moments it may demand not “being nice,” but rather, for example, bluntly confronting someone with an uncomfortable but consequential truth they’ve been avoiding.  It also does not mean giving free rein to feelings, that is, “letting it all hang out”.  Rather, it means managing feelings so that they are expressed appropriately and focused effectively, enabling people to work together smoothly toward their common goals.

Women are not “smarter” than men when it comes to emotional intelligence, nor are men superior to women.  Each of us has a personal profile of strengths and weaknesses in these capacities.  Some of us may be highly empathic but lack some abilities to handle our own distress; others may be quite aware of the subtlest shift in our own moods, yet be inept socially. (2)

In summary, our level of emotional intelligence is not fixed genetically, nor does it develop only in early childhood.  Unlike IQ, which changes little after our teen years, emotional intelligence seems to be largely learned, and it continues to develop as we go through life and learn from our experiences; our competence in it can keep growing.  In fact, studies that have tracked people’s level of emotional intelligence through the years show that people get better and better in these capabilities as they grow more adept at handling their own emotions and impulses, at motivating themselves, and at honing their empathy and social adroitness.  There is an old-fashioned word for this growth in emotional intelligence:  maturity. (3)

People in business are beginning to realise that success takes more than intellectual excellence or technical prowess, and that we need another sort of skill just to survive and certainly to thrive in the increasingly turbulent labour market of the future.  Internal qualities such as resilience, initiative, optimism and adaptability are taking on a new valuation. (4)

For me personally in business, my success is achieved by:

• Initiative, achievement drive and adaptability.
• Influence, team leadership and political awareness.
• Empathy, self-confidence and developing others.
• Understanding my client and their internal and external customers.
• Being trust, truthful and honest.

And yes, these qualities have been tested, but at the end of the day I am persistent and understand what is right and wrong – I stick by my convictions and hopefully on a basis of correctness and consistency the relationship is forged and develops fully creating loyalty, respect and business success outcomes.  In this fashion I hope to re-enforce my own professional integrity and the Flint Forensics brand.  Just remember, It’s All About Money ® and its also about setting the expectations for all internal and external customers!

In the next newsletter, I will introduce you to the “The Emotional Competence Framework.”

Footnotes:

1. Vendor-retailer relations and negotiation style: Shankar Ganesan, “Negotiation Strategies and the Nature of Channel Relationships,” Journal of Marketing Research, May 1993.
2. “Working with Emotional Intelligence”, Daniel Goleman, 1998, page 6 and 7.
3. “Working with Emotional Intelligence”, Daniel Goleman, 1998, page 7.
4. “Working with Emotional Intelligence”, Daniel Goleman, 1998, page 11.

Actual Case Investigated - Short Story "Love means different things to different people."

This is an actual story about a case I investigated a couple of years ago which was interesting in so many facets and one which I wanted to share with you.  The character names are fictional.

Prologue

I became aware of Russell “Rusty” Crowbar years ago, when he filed an income protection claim with one of my consultancy clients.  Crowbar had filed a claim stating that due to an sickness he was unable to work and was therefore entitled to money for lost income under the insurance policy. At that time, he owned Four Rusty Wheels Tours and the Rusty Crowbar Café.  I knew that his tour company had appointed a liquidator in July and that the café was well on its way to being deregistered.  I also knew that Russell Crowbar had been bankrupt for three years.

Although I was not heavily involved in his income protection claim or its resolution (I was engaged to review the financials in my capacity as a forensic accountant), I did know about the surrounding circumstances. The claims manager didn’t even need to break down the case for my appraisal: it was the sort of file that just shouted out for the wrong kind of attention. And what made it even more conspicuous was the fact that Russell Crowbar had been extremely aggressive throughout the process and displayed questionable personal integrity.

Little did I know at the time, but while my client was processing his claim, Rusty met Nichole Goatchild, an attractive and independent widow with her own home and three children. It was in her home that Rusty would eventually take up residence. It was also the same place where subsequent discussions with Nichole would confirm that Crowbar had convinced her to borrow against the bricks and mortar of her home to form a company — of which she was the sole director and shareholder — and use it to purchase $500,000 worth of scaffolding.  From there it was just three easy steps before Nichole had Upright Scaffolding up and running, ostensibly all on her own.

My goal in the workers compensation claim investigation was central to the plaintiff’s assertion that Rusty actually had the capacity to work and that his post-claim income was either the same or higher than what he earned at the time of the accidents.  In this line of inquiry I eventually exposed anomalies that indicated Rusty was hiding income from my client.  This complex investigation entailed liaising with former employees, employers, business partners and liquidators to provide an expert witness report to the court.   

The Perpetrator
Handsome and heartless even into his fifties, Rusty Crowbar was a man with more faces than Ayers Rock; charming, cogent, calculated and ultimately criminal, Crowbar had enough background to fill much more than his own hulking 6'6" frame. Moving throughout the major cities of Australia all of his adult life, Crowbar was as comfortable in the outback as he was in the top end of town, whether he was setting up a business deal with bankers or leading the line at the bar with his construction crew. But he was also known to switch quickly from laughter to anger and from jester to jouster — his handsome smile gave way easily to a grimace.  But the many ladies in his life rarely saw that side of him, at least not until the end of their relationship with the flame-haired Russell “Rusty” Crowbar….

The Paramour
With a nature as fair and fine as her complexion, Nichole Goatchild was a wealthy, widowed mother of three who had devoted her life selflessly to raising her children after the tragically premature demise of her husband and childhood sweetheart, Billy. Devoted to his family, Billy had the foresight to insure his life generously to provide for his loved ones.  However, the years since Billy’s death had brought Nichole loneliness and longing in addition to financial comfort, so when a family friend introduced her to the craggy, charismatic Crowbar, she fantasized faintly that she might have, just somehow, found love again for herself and maybe even a new father for her sons.  

The Partner
Mel Fender was a married man with a loving wife and two daughters. He had spent his entire career in the scaffolding industry.  Working as manager for one of Melbourne’s big construction companies, Mel had earned respect as a man’s manager with a reputation for being as straight as six o’clock. That was until Rusty lured him into a partnership with the all-too-attractive promise of being his own boss.

The Pawn
Guy Poorly was a naïve 22-year-old who had left school with little education. He became a laborer for his uncle Rusty on various building sites and tried to ape Rusty’s flashy appearance — a yellow sports car, white leather shoes and the latest, loudest mobile phone his credit would allow.  Guy idolized his uncle, and, in return, Rusty played a large role in ensuring that Guy attained his scaffolding certificate.

The Supporting Cast
Kate Blankencheck was Rusty’s bookkeeper. She worked part time, three days per week, doing job costing and administration work. Hugo Seething was a qualified accountant and long-time, book-friendly “business associate” of Rusty’s.

The Play

There were three companies involved in the Rusty’s well-orchestrated sequence of events.

Upright Scaffolding Pty Ltd
Upright Scaffolding was Nichole’s company and was located on a main road, the perfect exposure for promoting the business. Crowbar worked for Upright for six years, until Nichole closed the business.  Crowbar moved into Nichole’s home with her three young boys before she started Upright.

Crowbar’s Upright Scaffolding Pty Ltd 
After Nichole closed Upright, she and Rusty opened Crowbar’s Upright Scaffolding together; this time, Rusty was a director and 50 percent shareholder. He brought in Mel Fender as a business partner and on-site project manager. The business operated from the same office that Upright used, on the main road. All of Upright Scaffolding’s staff seamlessly began working for Crowbar’s Scaffolding. Until fourteen months later….

Phoenix Scaffolding Pty Ltd 
… when another new company was formed — the appropriately named Phoenix Scaffolding.  Rusty’s nephew, Guy Poorly, became the sole director and shareholder, non-beneficially, from the incorporation of Phoenix.  Rusty became a shareholder about six months into incorporation and the business again operated from the same office space on the main road.  All employees from Crowbar’s Scaffolding began working for Phoenix Scaffolding after the administrators moved in, except Mel Fender.  Mel was neither invited nor wanted to be party to it — he’d already had a stomach full of dealing with Rusty and his selfishness.

The Discovery

All of Rusty’s companies conducted the same business.  Upright Scaffolding suffered no operational financial or accounting issues because Nichole was in control — until Rusty came out of bankruptcy and forced Nichole to pay him a higher salary, that is. Crowbar’s Upright Scaffolding, however, was financially administered by Rusty, and this is where my involvement in the case began. 

I was engaged to investigate Rusty’s business activities on behalf of my client, a workers compensation insurance company that wanted to substantiate Rusty’s income and determine if he was working.  The following transactions were discovered during the investigation:

• Private expenditures were claimed as business expenses. Both partners, Rusty and Mel, put money in the company as loans; however, Rusty took out his straight away and claimed other expenses against it.
• Income paid in cash was abnormally recognized on the financial report. Cash was allegedly used to pay expenses on behalf of the company and then funds were credited to both directors’ loan accounts as though either Rusty or Mel had put their own personal funds into the business.   Mel Fender said he only deposited money three times in the amount of $10,000.  We discovered cash, check and direct deposit transactions totaling $65,000, credited to the directors’ loan accounts that, under normal circumstances, should have received loan deposits from the directors to fund working capital.
• $75,000 was credited to Mel’s loan account, but he vehemently denied receiving the funds as a repayment of his loan to the company.
• Rusty’s private rent was paid and claimed as a business expense without Mel’s knowledge.  Rent was $25,000.
• Rent for the storage of Rusty’s boat, in the amount of $3,000, was claimed as a business expense without Mel’s knowledge.
• The directors’ wages were improperly recognized in financials.  Mel Fender stated he was never paid any wages.  Wages were $36,000 for Mel.
• Interest paid on Rusty’s mother’s home loan was claimed as a business expense without Mel’s knowledge.  Interest was $21,000.  There was no loan taken out by the company.

Crowbar’s Upright Scaffolding operated for 14 months before going into bankruptcy.  No income taxes were paid and no returns were filed.  Mel Fender confronted Rusty and Hugo Seething, the accountant, but he couldn’t change Rusty’s “management” of the company funds.

Rusty then created Phoenix Scaffolding after Crowbar’s Upright went under. All of Crowbar’s employees were hired by Phoenix Scaffolding except Mel Fender. I initially only reviewed Phoenix Scaffolding’s  detailed profit and loss statement and balance sheet and noticed discrepancies in the management information system’s data file (the accounting system) from Crowbar’s Upright Scaffolding.  But the only difference was that $300,000 in scaffolding equipment was recognized on the books of Phoenix Scaffolding as a contribution from Rusty.  This $300,000 provided him with leg room to show income as a repayment of his loan account and reduced the amount of income being disclosed to the Australian Tax Office (ATO).

Workers Compensation

Crowbar lodged two workers compensation insurance claims for injuries allegedly sustained while he was working with Upright Scaffolding.  He alleged that he was totally disabled and received no income from his own activity over a period when he was either an employee or working director and shareholder.   Crowbar maintained that prior to his injuries he had been earning $1,500 per week.  My client’s contention was that he had continued to work and the suspicion was that he appeared to be hiding income from his own activity.

I began my investigation by reviewing all the available information, including applications, claim forms, surveillance and doctors’ reports to ascertain Rusty’s business structure, activities, financial and personal profile and the trends and patterns of his work, down to his daily business operations.

I conducted a high-level financial analysis by collating all business and financial reports and income tax returns of all related entities.  The review highlighted several expense and balance sheet accounts that required further investigation (many accounts were inconsistent with my understanding of the scaffolding industry). I also communicated with Rusty’s lawyer and conduct interviews with employees of both Upright Scaffolding and Crowbar’s Upright Scaffolding. 

After analyzing the records, I interviewed Nichole Goatchild and obtained a witness statement with details of Rusty’s involvement with and financing of Crowbar’s Upright. Nichole provided the history of Rusty’s movements during the time we were investigating and source documentation (exhibits) with the areas where investigations would yield the best outcome highlighted for me.

I also interviewed Mel Fender and Kate Blankcheck in person and employed different body language, emotionalist and interviewing techniques with each to gain their trust.  Body language can be a persuasive investigative technique if you know how to use it correctly and how to read the other person’s signals. Along with body language, effective listening is a helpful skill in interviews.  Some people just really want to talk and, luckily for me, Nichole was one of them because she was bitter about her relationship with Rusty.  Mel Fender, conversely, was too busy to be forthcoming. My challenge was to keep up with him and remain available to get time in his busy days to meet.

Next I interviewed the liquidator of Crowbar’s Upright, who gave me copies of source documents that proved conclusively that some of the company transactions were personal. The liquidator also provided files revealing several ways Rusty evaded taxes and hid funds from his business partner, including paying private expenses that had nothing to do with the business, namely his mother’s residential mortgage, storage for his boat and his own rent.

Through the litigation process I also obtained financials for Phoenix Scaffolding and learned that Crowbar introduced assets into the company in excess of $300,000 through a loan account. All my findings were included in the final expert witness report I submitted to the lawyers working on Crowbar’s workers compensation claim. 

Expert Report

My report was intended to present the facts in support of the two simultaneous insurance claims and was eventually used to discredit Crowbar and put my client in a strong negotiating position.  My client’s lawyers, enabled by my findings, were able to significantly reduce the compensation payment to Crowbar (by $600,000) and discredit him, allowing them to settle out of court.

Nichole’s $300,000 worth of scaffolding showed up in Phoenix Scaffolding’s assets, to which she was alerted after obtaining a copy of my report.

Mel walked away unscathed and moved on with life; he secured another high-profile job in the construction industry.

The case didn’t go to court, so the taxation office didn’t find out about Crowbar’s tax evasion. However, with the company being liquidated, it was unlikely that the tax office would have taken action.

Lessons Learned

If you can access the management information system and source documents, it becomes easier to uncover suspicious behavior in an organization.  Even with this information, it is also important to corroborate it with other sources.  Constant evaluation and reflection enables an investigation to be focused and refocused as required.

Upright Scaffolding

Nichole might have been naive to hire Crowbar with no formal agreement and, after he came out of bankruptcy, he was able to convince her to double his salary.  The company’s most valuable asset was the scaffolding, and Nichole should have taken annual inventory to protect it.

Crowbar’s Upright Scaffolding

Segregation of Duties
Crowbar had control over the bank account and the financial recording and reporting, even though Crowbar’s Upright employed a bookkeeper to enter data into the management information system. Mel Fender had no access to the records.

Internal Procedures
Initially, procedures required two signatories for making payments by check, but Crowbar quickly altered the policy to allow only one signatory. It was a mistake for Mel to allow Crowbar to eliminate this control. Crowbar had full control over the bank account to direct debit expenses, and he had full control over data input. There was no approval process in place to authorize and approve all payments.

Monitoring Controls
Some people get caught up in the euphoria of owning their own business, and can be naive about their business partners. Mel could have established — but didn’t — a system that would have reported weekly profitability for the company as well profit by job.  By his own inaction he contributed to being kept in the dark about the financial performance of Crowbar’s Upright.

Phoenix Scaffolding

My review of the financial statements confirmed that Crowbar had continued his fraudulent activities (non-disclosing income to the taxation office and claiming private expenses in the company) through the same accounts he used with Crowbar’s Upright.  The only difference was that he fully owned Phoenix Scaffolding.

Recommendations to Prevent Future Occurrences

Partners entering into business arrangements should fully understand their fiduciary duties. Conduct preliminary background checks for failed companies and past bankruptcies, and have discussions with known suppliers, customers and business partners to establish past business performance, ethics and behaviors.

Mel Fenders should have set up the business to include fundamental control and monitoring systems.  In similar situations, the following should be implemented:

• Form an internal control structure.
• Segregate duties.
• Develop adequate controls over cash.
• Develop controls and systems to ensure the security over company assets.
• Develop monitoring controls to review the regular operation and financial performance of the business.
• Create shareholder and employment agreements.
• Hire an independent director with a financial and/or legal background to serve on the board to ensure adequate controls and monitoring systems are in place.

The weak internal control structure present in all three scaffolding companies allowed Crowbar to cheat the tax office, Nichole and Mel; liquidate Crowbar’s Upright Scaffolding; evade taxes; and hide his fraudulent activities.

Epilogue

In any investigation or dispute, whether the desired outcome is achieved, everything hinges on sufficient and appropriate evidence to prove a position based on a known set of facts.  Examiners need to have access to all the records and be able to extract the relevant information from those records. They should also be able to reform their working hypotheses if the facts demand it.

Nichole and Mel were so excited about running their own business but they didn’t consider the essential internal controls, and Crowbar exploited their lack of planning. The trends I saw in their business led me to recognize a common motivation. Nichole’s love for Crowbar and Mel’s love for the building trade clouded their judgment, which enabled Crowbar to nurture his love of himself. It turns out that love really does mean different things to different people.

Biography

Based in Sydney at the heart of Australia’s finance sector Bruce Flint is an adroit and experienced CA with broad, detailed experience in senior audit roles servicing major public utilities and infrastructure concerns and senior audit and management roles in public listed entities.  Bruce now directs his accountancy acumen in driving his consultancy firm, http://www.flintforensics.com/, which not only provides profitable solutions to the legal profession and the insurance industry but also offers investigative and technical expertise to those in risk management as well as personal and commercial litigation support.

Administration

I have available a series of instruction forms under downloads which also have guidelines as to what information may be required for specific tasks.  This is a valuable resource and I can only stress the importance of requesting the right information the first time to make the financial assessment the most efficient and effective as possible and make the claims experience more enjoyable.  Please feel free to review these at your leisure.

You can either print them out or simply unprotect the document by using the password "FLINTFORENSICS" and save the document to your desktop.

If you need to expand on your instruction, when you refer matters, simply delete from page 2 and details further.

Looking forward to working with you all in the coming year as we are all working on the same team.

In the next edition, look forward to more and specifically Emotionalist theory.

Talk to you soon,

Bruce Flint
Managing Director

FLINT FORENSICS PTY LIMITED - Assessment of Economic Loss, Expert Witness, Financial and Other Investigations, Income Protection Risk Management, Regulatory Investigation and Assessment, Training and Valuations

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