edited by andi mcneal FRAU D FIN D IN GS
Whirlwind of Deception
R
obert Douglas, the chief finan­
cial officer (CFO) of Wind Power Systems
(WPS), was very worried. A meticulous
accountant, Douglas had built a long and
respected career as a financial executive. Now
he was breaking every rule in the book, and
he feared that a reckoning was imminent.
When Douglas joined WPS less than five
years ago, he thought it was the perfect job.
As a fast-growing, publicly traded wind
turbine manufacturer, WPS offered Doug­
One CFO, presented las an opportunity to make a large amount
of money in salary, incentives, and stock
with pressure and options. But two years ago, as financial pres­
sures mounted and sales failed to material­
opportunity, involves ize, Douglas started manipulating the books
so WPS could keep reaching its earnings esti­
himself and others in a mates. His scheme started small but quickly
mushroomed into a significant financial
financial statement fraud statement fraud. Douglas told himself that
the company would take off soon — sell and
that bankrupts a company. earn its way out of trouble — and then he
would correct all of the accounting deceit.
By J ay da w dy He realized that his time ran out one morn­
ing when he arrived at work early to find a
trio of delivery trucks from Dillon’s, one of
WPS’ vendors, blocking the entrances to the
company’s parking lot.
Douglas wasn’t the only one who noticed
the delivery trucks that morning. Brenda
Zimmer, a newly hired internal auditor,
also arrived at work early and saw the con­
frontation that ensued. Despite Douglas’
pleading and apologies, Buster Dillon, the
owner of Dillon’s, said he wasn’t moving his
trucks until he received payment on very old
invoices. A crowd of curious WPS employ­
ees was quickly forming, so Douglas hastily
cut Dillon a check and told everyone it was
a simple mix-up. But Zimmer’s skepticism
grew. She had overheard the argument
between Douglas and Dillon, and it didn’t
sound like a misunderstanding to her.
Zimmer wondered if WPS could be that
tight on cash or if the company was simply
so disorganized that Dillon’s invoices had
fallen through the cracks. She decided that
neither answer was good for WPS. It was a
bad sign when a company stopped paying
one of its primary vendors, so Zimmer put
on her investigative hat and went to work.
By talking with accounts payable person­
nel at WPS, Zimmer discovered that payment
delays and cash flow issues were widespread.
Two accounts payable clerks stated that they
had been instructed specifically by Douglas
on numerous occasions to delay payments to
vendors. Additionally, they confirmed that
cash was very tight, which seemed to belie the
company’s recent record earnings — unless
WPS wasn’t collecting all of the money from
those sales.
Zimmer also interviewed an accounts
receivable analyst, Jenny Clarkson. Dur­
ing the interview, Clarkson was obviously
stressed. She said she had been trying
to collect old receivables for the past few
years, and the problem was getting worse.
Customer complaints had gone up signifi­
cantly in the past year. They ranged from
under-filled shipments, shipments received
that had never been ordered, and promised
discounts that were never applied. Because
of such problems, many of the customers
simply refused to pay their bills. Clarkson
had investigated many of these complaints
herself and found they were accurate. How­
ever, when she brought her concerns to her
supervisor, Clarkson was told not to worry
about it and to just do the best she could to
collect the receivables. Clarkson also recom­
mended that several uncollectible accounts
be written off, but was told that Douglas
would never approve write-offs that would
decrease earnings.
Zimmer realized she was dealing with
significant accounting issues. The earnings
increases that WPS had been reporting
didn’t match the incoming cash flow. And
many receivables appeared to be bogus or
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april 2009 Internal Auditor

problematic — either due to mistakes or
something more dishonest.
After the initial interviews, Zimmer
reviewed the company’s financial state­
ments closely and noticed that WPS had not
written off any receivables in the past few
years, despite having significant uncollect­
ible accounts. She wondered if some of the
related sales were falsified and sought to con­
firm her suspicions by putting her forensic
accounting skills to work. She started with
a review of customer files and found that, in
many cases, there were no signed contracts
or purchase orders on file for shipments. She
also found discrepancies in the quantities of
product ordered and the amounts shipped
and billed. In some cases, WPS shipped more
product than was ordered and billed for the
full shipment. In other cases, the amounts
billed exceeded the number of items shipped.
Both scenarios resulted in bogus sales, which,
as Clarkson indicated, led to customer com­
plaints and refusals to pay.
Zimmer also discovered huge increases
in items shipped at the end of each quar­
ter, often propelling the company to sales
and earnings figures that slightly exceeded
analysts’ forecasts. Meeting these targets
had earned WPS praise on Wall Street
and contributed to a soaring stock price.
However, when she examined records
from the subsequent periods, Zimmer saw
a disproportionate number of returns at
the beginning of each quarter and realized
WPS had been channel stuffing to meet
quarterly results. The only questions now
were how bad the damage was and how
high up the chain the fraud extended —
who knew what when?
As Zimmer attempted to interview
high-level accounting and finance person­
nel, she was met with resistance and delays.
She suspected Douglas was hindering her
investigation by telling employees not to
speak with her. Zimmer then discovered
that WPS’ long-time controller, Stewart
James, had left the company a few months
before. She figured that a former employee
like James might be more willing to discuss
the accounting issues at WPS — and she
was right.
James explained in detail much of the
story that Zimmer had suspected. He told
Zimmer that he left WPS because he didn’t
want to be a part of management’s account­
ing charade. In addition to confirming the
F RAUD F I ND I N G S
bogus shipments, channel stuffing, and over­
stated sales and receivables, James said WPS
was “capitalizing everything under the sun.”
James also shared that WPS had not written
off obsolete inventory in several years. Every
time he had brought up the bad receivables
and inventory write-offs, Douglas told him
to forget about it. James confirmed the
involvement of senior management in the
fraud and produced e-mails and other docu­
mentation to back up his story.
Douglas finally cooperated when con­
fronted with the overwhelming evidence.
He outlined exactly what had occurred
at WPS over the past few years: Under
pressure from the chief executive officer
(CEO), Douglas, along with a group of
sales, manufacturing, and shipping exec­
utives, had engaged in several accounting
improprieties to meet earnings expecta­
tions and keep the company’s stock price
high. Douglas said he had planned to
correct the bogus accounting, but he was
ordered to make the numbers work, and
the accounting problems multiplied.
After completing her investigation, Zim­
mer determined that the fraud had been
ongoing for at least the past two years and
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april 2009 Internal Auditor

had grown considerably in scope in the past
year as earnings pressures mounted. WPS
had to restate two years’ worth of financial
statements, triggering U.S. Department of
Justice and Securities and Exchange Com­
mission investigations as well as shareholder
lawsuits. As a result of the investigation and
the restatements, Douglas, the CEO, and
executives in both sales and manufacturing
were terminated by the company. Several
of the officers were indicted and prosecuted
for their involvement in the fraud, includ­
ing Douglas and the CEO. The share price
of WPS plummeted, and shortly thereafter
the company declared bankruptcy.
Le ssons Learned
n A single red flag, explored more
fully, can lead to the discovery of
much bigger issues. An inquiry into
delayed vendor payments resulted in
the detection of a massive account­
ing fraud. Internal auditors, external
auditors, and investigators must pay
attention to all red flags and investi­
gate accordingly.
n A stronger internal audit function
may have led to the discovery of WPS’
problems much earlier. The company’s
internal audit function was weak for
many years, and Zimmer was only
hired due to pressure from the outside
auditors to improve the internal audit
function. Although the U.S. Sarbanes-
Oxley Act of 2002 has strengthened
internal audit functions and increased
audit committees’ responsibility and
independence, these functions must
have the appropriate authority and
funding to be effective within any
company. The members of both func­
tions must have the courage to step
forward, investigate, and take action
when they see management is on the
wrong track.
n A fraud hotline would have allowed
James and Clarkson to blow the
whistle, triggering an investiga­
tion. Had an anonymous reporting
mechanism been in place, employees
who had knowledge of the financial
manipulations could have reported
the scheme without fear of recrimina­
tion or retaliation.
n Tone at the top is very important. If
company executives don’t incorporate
F RAUD F I ND I N G S
a culture of ethics, an environment will
exist where fraud can flourish. At WPS,
the tone at the top was clearly lacking.
The CEO aggressively pushed earnings
targets, and other members of man­
agement resorted to financial manipu­
lation to meet these goals. Studies have
shown that when senior management
is involved in financial statement fraud,
the fraud tends to go on longer and
be more significant. This was certainly
the case at WPS, and the company suf­
fered disastrous consequences.
Jay Dawdy, CFE, CMA, is partner and
senior managing director for Gryphon
Investigations in White Plains, N.Y.
To comment on this article, e-mail the author
at jay.dawdy@theiia.org.
WANTED: Your fraud finding stories. If you have a
fraud finding you’d like to share, send it to:
Andi McNeal, CFE, CPA
ACFE World Headquarters
E-mail: amcneal@ACFE.com
Fax: +1-512-478-1444
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april 2009 Internal Auditor