Financial Advisor to Bank Regarding Seafood Distributor

Forensic Accounting

Warehouse

The Bottom Line: 

Stapleton Group researched questionable operating procedures at its bank client’s borrower that inflated the company’s borrowing base, resulting in an over-advance.  We identified the following issues by analyzing the company’s inventory procurement, sales and cash transactions; our findings enabled the bank to make an informed decision about its $40 million loan commitment:

  • Eligible accounts receivable were inflated due to Insufficient internal controls that failed to identify errors and manipulation of cash receipts.
  • The borrowing base was inflated as a result of substantial transactions with related companies and unreported suspected affiliated companies, including entities owned by the borrower’s wife.
  • Unusual patterns of sales to certain customers, such as varied documentation and illogical invoice totals.
  • Independence concerns related to the borrower’s contracted CFO and financial audit firm.

The Business Issue:

A bank was concerned about certain transactions between a borrower and some of its customers, including companies owned by the borrower’s wife.  The bank questioned the borrower’s overall financial position and reliability of its borrowing base calculations.

Genesis of Stapleton’s Engagement: 

We were engaged by the bank to conduct a forensic analysis of the borrower’s books and records to identify any undisclosed issues in the financial statements and borrowing base.

Obstacles and Stapleton’s Solutions:

  • Limited time to determine the reliability of the financial statements.
    • Stapleton strategically tested key transactions related to the borrower’s procurement of inventory, sales and cash receipts.
    • Stapleton identified errors or manipulation of cash receipts and accounts receivable cross-aging buckets causing us to suspect inventory “round-tripping” via the affiliated companies. Our recalculation of monthly aged A/R reduced the company’s borrowing base by about $2.0 million, resulting in an over-advance.

  • The borrower’s representatives stressed that all affiliated companies and transactions had been disclosed.
    • Stapleton tested patterns of inventory purchases and sales between the borrower and identified parties, analyzing the timing and amounts of transactions, the parties involved, and the types of inventory items transacted.
    • Stapleton identified that over 60% of the borrower’s sales were transacted with affiliated or potentially affiliated companies.
  • The borrower’s inventory procurement and sale records, including shipping and delivery documentation, lacked verifiable third-party information.
    • Stapleton performed sample inventory test counts across multiple warehouse facilities.
    • Stapleton discovered documentation for transactions with disclosed affiliated companies and transactions with all other companies was inconsistent, raising the suspicion of inventory round-tripping.

View All Results

Website Designed and Built by Elimint | Log in