Previous post gave the background of a corruption case in a city near to where I live. I’m using this actual situation as a short case study for CPAs.
Now, if you are the auditor of the city how could you possibly come across any red flags that this alleged bribery had taken place? I don’t see how any auditor would be able to see anything out of line.
The only documents alleged are a consulting contract between the business and a construction company owned by the mayor’s alleged helper. Those documents are outside the government entity so could not be seen by the city’s auditor. The alleged payments from the business to the construction company would obviously not be visible inside the city’s records.
The only possible documentation inside the government entity might be an appointment the mayor has with licensing officials. When would those types of records ever be looked at by any external auditor? No reason that should ever be done. Even if some staff person looked at appointment records for some reason (yeah, like thats ever going to happen – just try explaining that time to the audit manager!), how could an auditor possibly identify that one out of dozens of meetings was supposedly illegitimate?
Now, if you’re auditing the company that supposedly got shaken down, what in this scenario would have clued you in that the company was supposedly paying bribes? Hiring a consultant to try to get your license back would be a perfectly legitimate thing to do.
In fact, I have audited clients that have paid legal firms to guide construction programs through the city licensing process. I have seen situations where the amounts involved are large multiples of the amounts involved in this situation. That type of contract would easily look like it was a legitimate transaction and legitimate expense.
The only possible warning sign is the consulting contract was with a construction company. The skills to negotiate the labyrinth of bureaucracy don’t usually exist in a construction company. That might be a red flag. To expand our case study, lets assume our alleged situation were hypothetically to expand so that management argued that this particular builder had that skill to help and it was worth the effort. In such a situation, it would be really difficult for auditors to recognize they were hearing a cover story.
So I don’t know what could have been seen in the circumstances as alleged by the FBI that would have clued in an auditor of either the city or the local business that anything illegal was in play.
Next, let’s change the circumstances.