S.J. Grand was hired in late 2012 to conduct the pre-acquisition audit. “During the investigation’s first phases, we promptly realized severe accounting irregularities were taking place: somebody was getting richer and richer behind the back of the company’s ownership”, continues Stephane. Indeed, after more accurate investigation, we pointed out a fraud was happening.
Sometimes, the scam is so big that is almost hard to believe.
As a matter of facts, the Chinese General Manager was hiding that he founded 17 companies to supply raw materials and machines, as well as to purchase finished products, diverting the company’s profits into his pockets. As this wasn’t enough, he also opened a bank account in Hong Kong to divert revenues of foreign sales. Smart guy.
“Be pitiless and cold-hearted, don’t let the felon get away with its crime!”
Although we recommended the new ownership to strike hard and fast, they tried to negotiate with the General Manager and this led them nowhere but to the abyss. The sly General Manager went to the next level starting to move the machines out of the premises to a new factory established across the river in Jiangsu. This new factory was using the brand name Caddie, violating the company’s name property right. Moreover, the felon and the company’s bank manager came from the same small village in inner China. The fact hided a possible collusion, even if we didn’t succeed to prove it.
During the whole investigation, the General Manager refused to cooperate. When senior executives show aggressive behaviors, not only during the audit but also when making critical financial decisions, they are most likely committing a crime. Ethical weakness and anger can be powerful signs to unveil shifty personalities. The manager, after being officially fired by the new ownership, refused to return official documents prohibiting the company to change registration. In this way, he (un)officially remained the head of the Shanghai branch, in spite the shareholders’ decision.
This case of fraud demonstrates that, no matter the size of your company, a serious embezzlement can be under your nose. The fraud in Caddie China involved the following illegal circumstances:
- Parallel companies: creation of 17 parallel companies that sold and bought raw materials and finished products to divert extra money in the manager’s pockets;
- Embezzlement: opening of a bank account in Hong Kong to divert profits coming from abroad;
- Potential collusion: corruption or favors between the company’s bank manager and the General Manager;
- IP infringement: stealing the brand’s name by opening a second company named Caddie.