Financial reporting fraud is the deliberate misstatement or omission of amounts or disclosures in a company’s financial statements. It involves intentionally misrepresenting the financial position or financial results of the company in order to alter the company’s actual profits and losses.
Financial reporting fraud can be carried out for many reasons, and can involve the manipulation or falsification of:
- Assets
- Liabilities
- Revenue
- Expenses
- Disclosures
Financial Reporting Fraud Case Study
In July 2017, Mr. Bailey purchased a controlling interest in VendPot, a company that specializes in the legal dispensing of marijuana products through proprietary vending machines. The VendPot machines scan a patient’s medical marijuana card to confirm identity. Once confirmed, it uses biometric authentication in order to ensure that the patient is the person that they are representing themselves to be.
In August 2017, Mr. Bailey set up a shell company called Bail-Vend Investments, which was registered under his wife’s name. Mrs. Bailey would assume the positions of CEO, corporate secretary and sole officer and director.
In December 2018, Mr. Bailey transferred his VendPot shares to Bail-Vend Investments, without registering the purchase. Mr. Bailey created fraudulent documentation stating that Bail-Vend Investments had paid $3,000,000 for the shares of VendPot, when in reality nothing was paid.
Throughout the first two quarters of 2019, Bail-Vend Investments illegally sold VendPot shares as restricted securities in several private transactions. As a result, they received tens of millions of dollars in proceeds.
In order to transfer the illicit proceeds from Bail-Vend Investments back to VendPot, Mr. Bailey had to fabricate the financial records of VendPot that were related to purported revenue transactions. This would, he believed, give the appearance that VendPot was in a much stronger financial position than it actually was.
In September 2019, VendPot’s accounting and finance department requested documentary support from Mr. Bailey that would indicate the financial ability to acquire the shares from Bail-Vend Investments. Mr. Bailey provided fabricated financial statements to both the auditors and the accounting and finance department with the sole purpose of misleading them.
In October 2019, Mr. Bailey was arrested. The OSC claimed that they had investigated the transactions between VendPot and Bail-Vend Investments, and that over 95% of VendPot’s revenue figures were completely fictitious.
Relevant Evidence:
- Contracts and Agreements
- Financial Records
- Banking Records
- Corporate Profiles and other Company Registered Documents