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The Phony Customer Fraud​

An unscrupulous employee reaps the benefits of weak internal controls.

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​Brightstar Corp. is a solar panel company with an annual revenue of $4.5 billion. It had recently acquired Solarstar Inc., a smaller competitor. Both companies employ commission-only sales representatives; however, commission plans vary between the companies. Brightstar pays sales representatives upon the installation of a solar panel system, while Solarstar’s commission plan pays half a commission upon the signing of a customer contract. The remaining commission is paid after installation of the system. If the customer cancels the installation, the commission already paid is clawed back against future commissions.

Robert Schull and Alysa Cayden, Brightstar’s forensic audit team, were conducting a training session with the recently hired director of compensation, Lisa Myers, on fraud schemes perpetrated by sales representatives. At the end of the presentation, Myers approached Schull and Cayden to discuss her concerns about Eddie Fogbottom, a sales representative in the Austin, Texas, market.

Fogbottom was a rising superstar at Solarstar. Before joining the company, he was an executive in loss prevention at several large publicly traded companies. He had incredible success as a sales representative and was recently promoted into a highly sought-after manager role within the company’s national sales team. Shortly after accepting his new position, 39 of Fogbottom’s sales were cancelled, representing $10,000 in commissions that would need to be clawed back. Because it was such a large amount, Myers contacted him to discuss a repayment plan.

Fogbottom told Myers that the company could not claw back the commissions. When he was promoted, he had a clause written into his offer letter allowing him to keep all commissions for prior sales, even if customers cancelled their accounts. Myers suspected fraud.

Solarstar uses electronic contracts, which are emailed to the customer when completed. The customer reviews the contract, and electronically signs and returns it. Contracts are not legally binding until the contract is returned and a down payment is received. An electronic time and date stamp is recorded on the contract as well as the customer’s computer internet protocol (IP) address.

Schull and Cayden began reviewing the cancelled contracts. The team identified several days where Fogbottom sold products to multiple customers in what appeared to be strip malls in the Austin market. What caught the attention of Schull and Cayden was the fact that the contracts were signed and returned within several minutes of each other. Even more perplexing, the contracts were returned from the same IP address.

The team began conducting customer service calls to the alleged customers to determine why they cancelled their purchases. Surprisingly, none of the phone numbers documented on the contracts were in service. In addition, an internet review of the customers revealed that not a single customer had an internet presence.

The investigation team turned their attention to the down payments received on the contracts. Solarstar required its sales representatives to collect a down payment when a customer signed a contract. The sales representative would document the collection in the company’s order system. If the down payment was paid with a check, the sales representative would bring the check into the local sales office to be compiled and sent to the company’s lockbox. A review of the order system revealed that Fogbottom documented that checks were obtained during the contracting process, but none of them had been received in the lockbox.

Cayden reviewed the customer sites using Google Earth. The review revealed that many of the customer locations did not appear to exist or had been constructed after Google’s last update. Schull enlisted the assistance of Brightstar’s area general manager, Michael Gonzalez. A 25-year Brightstar veteran and lifelong resident of Austin, Gonzalez accompanied Schull to the customer locations. It came as no surprise when Schull and Gonzalez found themselves standing in empty fields. Schull documented the visits with photos of the alleged customer sites.

Schull then reviewed Fogbottom’s employment history. An internet search revealed that Fogbottom had, in fact, worked for the organizations he had listed on his résumé. However, no references were listed in his employment file. Schull was suspicious about why a former loss prevention executive would accept an entry-level sales position.

Fogbottom was asked to come to the Austin office for an interview with Schull and Karol Vesey from human resources. Schull believed the interview would be challenging as Fogbottom had extensive interviewing experience in his loss prevention role. During the initial stages of the interview, Fogbottom presented himself as a professional loss prevention executive turned successful national sales manager. He bragged about his experience and connections to the community.

When presented with the photographs of the empty fields, Fogbottom’s demeanor changed. He alleged that a general contractor named Sal was constructing all three strip malls, and that the customers met him at a local coffee shop where they all completed their contracts in succession. Fogbottom could not remember Sal’s last name or produce a contact number for him or any of the alleged customers. Initially, Fogbottom refused to admit that he falsified the contracts in question. However, after an extensive interview, Fogbottom admitted that he was having personal problems and was fired from his former employer. He also admitted that he falsified the contracts for the commissions because he had taken a substantial pay cut from his previous role and was having trouble making ends meet.

Fogbottom was terminated, but no charges were brought, and the money was clawed back. Solarstar updated its commission plans to only pay sales representatives upon installation. Two weeks after Fogbottom’s termination, Schull received a call from Brightstar’s Fresno, Calif., office where the same fraud scheme was suspected and later validated.

​Lessons Learned
  • A combination of fundamental internal control activities helps minimize fraud.
  • Conduct and update a fraud risk assessment regularly. In this case, a fraud risk assessment should have identified the control weakness in the backlog report, commission payment process, and revenue reconciliation process.
  • Conduct appropriate background checks on key employees to identify any red flags for possible unethical behavior.
  • Perform regular reviews of installation backlog reports to identify irregular activities. Detecting any potential exploitation is the best approach to minimizing negative unintended consequences.
  • Conduct monthly reconciliations of revenue collections. Discrepancies should be researched immediately and escalated if unresolved.

Grant Wahlstrom
Anisa Chowdhury
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About the Authors

 

 

Grant WahlstromGrant Wahlstrom<p><span><span>Grant Wahlstrom, CIA, CPA, CFE, is the forensic audit manager at a privately held company in Hollywood, Fla. </span></span>​</p>https://iaonline.theiia.org/authors/Pages/Grant-Wahlstrom.aspx

 

 

Anisa ChowdhuryAnisa Chowdhury<p>Anisa Chowdhury, CPA, is a senior forensic auditor at a security company in South Florida.​</p>https://iaonline.theiia.org/authors/Pages/Anisa-Chowdhury.aspx

 

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