TRADE SECRETS THEFT SAGA Auditors for Ascential Twice Warned of Possible Fraud Involving Flywheel

Who really likes accountants anyway? They are a bunch of nosy busybodies who are always trying to throw cold water on the activities of hunter-gatherers who keep the stew pot full of fresh meat and the home fires burning.

The very definition of an accountant is one who comes out after the battle is over and bayonets the survivors.

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EPISODE 17: KILL THE MESSENGER

BY KEN ROSSIGNOL
THE CHESAPEAKE TODAY

Following the purchase of Flywheel Digital, Ascential, a United Kingdom-based conglomerate of international marketing, data gathering, financial gurus, and modern-day version of the East India Company, which ruled much of the world in the name of the English King or Queen for centuries, paid for annual audit reports.

SHENANIGANS, MISCHIEF, FRAUD?

In order to stay on the right side of laws and regulations and to avoid serious consequences of improper, illegal, and more fraudulent conduct in the corporate world, firms hire auditors to take a peek under the dressings that cloak the real activities of the company.  They peek under the hood. They stick their noses in closets, dig up bodies buried in the basement, or hiden in false walls in the attic. They even lift the skirts of the very servants of the company in search of dastardly deeds and dirty dealings. Ugh. 

However, if you are an investor in such a firm, one would believe such an investigation would be deliciously useful in figuring out whether one should take their money and run for the nearest exit before the executives running the show clean out the investors. 

Jeffrey Cohen pleads guilty to $100 million insurance fraud scheme

The Maryland insurance scandal where Jeffery Cohen stole over $100 million dollars is such an example. Cohen was such a brazen thief he even tried to take back his guilty plea while in prison.

The Maryland Savings and Loan scandal cost depositors and taxpayers millions of dollars when a relative of United States Senator Ben Cardin, Jerome Cardin, and his Old Court Savings and Loan fleeced and embezzled his way to prison.  In the appeal Cardin made to try to overturn his conviction, the following passage was included in the decision by the Maryland Court of Special Appeals on March 28, 1988, when Cardin asserted that the closing argument made by the prosecutor was prejudicial:

“Cardin points to the following statements made during the State’s closing argument:

It is an old saying. Whether you are rich or poor, it is nice to have money. The more you have the more you want. That saying applies in this case. ….. Jerome Cardin is not the first person of wealth to steal. Unfortunately, he probably won’t be the last. ….. Essentially, the defendant would like you to believe he is not the type of person who would steal…. Can you tell by the way a person looks whether he would steal? Can you tell by the way he dresses? . .. We all know it isn’t the inner-city kids with sweatshirts that steal but from time to time, people in white collars, fancy clothes do so because greed knows no class.

We see nothing inflammatory about those statements. They were clearly within the allowable scope of the State’s argument.”

OH, THE IRONY

One of the defense attorneys in the above case was George L. Russell Jr, and his son, U.S. District Court Judge George L. Russell III has been assigned to hear the case of Compass Marketing vs. Flywheel.

ASCENTIAL – THE ANNUAL REPORT 2021 – Accelerating our strategy. Focusing on growth

The report of the Auditors includes this information about Flywheel Digital, which Compass Marketing states in its complaint, stole trade secrets from Compass:

“The valuation of these liabilities involves estimation and there is a risk that the valuation might be fraudulently manipulated to understate contingent consideration liabilities.

The effect of these matters is that, as part of our risk assessment, we determined that the fair value of these contingent consideration liabilities has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole, and possibly many times that amount. The financial statements (note 22) disclose the range of outcomes estimated by the Group.

The risk has increased in the current year due to new acquisitions in the year with associated contingent consideration and in aggregate there is a wider range of reasonably possible outcomes.

We continue to perform procedures over the valuation of the contingent consideration liabilities related to Flywheel and Yimian. However, as the remaining Flywheel payment is based on 2021 results, and for Yimian the remaining uncertainty relates to performance in 2022, we assessed that reasonably possible changes to the fair value of these liabilities would not be expected to result in a material movement.”

THE AUDIT REPORT FOR 2020 LAYS OUT RISK WITH FLYWHEEL AND YIMIAN

“The Group has recognised significant contingent consideration liabilities in respect of the Flywheel and Yimian acquisitions which are substantially all of the Level 3 total deferred and contingent consideration liability of £96.5m (2019: £68.4m) disclosed in note 20. There is inherent uncertainty involved in forecasting revenue of an acquired business, which determines the fair value of the liability as at the balance sheet date.

The effect of these matters is that, as part of our risk assessment, we determined that the fair value of the contingent consideration liability has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole. The financial statements (note 20) disclose the range of outcomes estimated by the Group.”

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