TIC Internal Control Case – DUE 10/11/16 On a warm, bustling August 2004 morning, outside of TIC's Jacksonville, Florida, building, it felt like thestillness after a storm. Hannah Lewer sat at her desk, reflecting on the events that occurred at TIC in the past six weeks. How many hundreds of thousands of dollars worth of computers were stolen because an employee in a managerial role was able to override the company's system of internal controls?She looked out her door at her former supervisor, Kevin Kennia's, empty office. A few months ago, no one would believe that this man would be fired for selling TIC's computers to non-approved resellers and pocketing the proceeds. However, looking back, Lewer realized that red flags were there all along. She was glad that she uncovered the fraud, but worried that she waited too long to report her discoveries. She thought about the month she spent gathering information before she felt confident notifying upper management of her suspicions. How many assets were lost during this delay? More importantly, how could this go unnoticed for so long in a large, sophisticated company like TIC?TIC Group, Inc. was a Fortune 500 global commercial finance company that provided financing and leasing products to many industries worldwide. With 2004 net income of $754 million, its Equipment Leasing division made up 16 percent of the company's total assets. This division specialized in leasing computers, copiers, and fax machines to companies, schools, and universities. At the end of the lease, customers could buy the equipment or return it to TIC.TIC hired Lewer in March 2000 as a Vendor Account Specialist, after obtaining a B.A. inBusiness Administration from Flagler College.Within two years, she was promoted to Senior Vendor Account Specialist to manage TIC's relationships with its used computer resellers. Lewer also interacted with the Credit Department, reviewed credit reports from Equifax, and recommended appropriate action. In April 2004, she was promoted to Remarketing Inventory Manager. In that position, she oversaw off-lease equipment that was returned to TIC's Jacksonville office, and managed the warehouses to which TIC would resell (or “remarket”) this off-lease equipment. If a customer wished to return equipment at the endof a lease, her team would send a return authorization to the lessee, instructing them to send the equipment for resale to an approved warehouse/computer reseller.Kennia supervised Lewer. He was born in Iran and attended college in London. He was an outspoken opponent of the current Iranian regime. Several members of his family settled in the United States, and Kennia helped support them. Kennia was generous to his family and coworkers. His subordinates viewed him as a great boss. He was married with two young children. Lewer remembered Kennia mentioning thathe and his wife went through several rounds of expensivein vitrofertilization before they had their twins.TIC hired him in January 2000. In October 2001, his supervisor, Senior Vice President Denise Thompson,promoted him to Director of Asset Management. In addition to her professional relationship with Kennia, Thompson also had a social relationship with him. They saw each other outside of work and occasionally had dinners with each other's families. However, their friendly relationship did not prevent Thompson from criticizing his performance when it fell below expectations. In his 2002 Annual Review, Thompson warned Kennia that his team needed to improve end of lease sales and inventory returns. As a publicly traded company, TIC placed much pressure on Kennia to meet monthly budgets. As Director of Asset Management, Kennia was responsible for the Remarketing Department that Lewer managed and the End of Lease Department, making him in charge of all returning off-lease assets at the Jacksonville branch.Lewer thought back to the biggest red flag that alerted her that something was amiss. On July 14, 2004, when Kennia was out of the office for a few days on business, a customer—PGT Industries—called to inform TIC that it had returned its leased equipment as instructed. Lewer replied that she did not
authorize PGT to return any equipment. She checked her files and found no record in the Inventory Tracking System, letters database, or Infolease system of anyone sending PGT authorization to return their equipment to a remarketer.PGT said it received faxed instructions, but Lewer was confused. The return authorization referenced a warehouse name and address that she did not recognize as an approved TIC remarketer. The equipment was directed to go to Venture c/o Tim Williamson. That name sounded familiar and Lewer remembered hearing Kennia mentioning a friend named Tim Williamson. She was baffled. She could not understand why the customer would receive a return authorization listing a non-approved remarketer and thought to herself, “I will discuss this with Kennia when he gets back.”Meanwhile, she looked up Venture on the Florida Secretary of State website to discover its full name was Venture Fitness. This made no sense. Why was TIC's office equipment being sent to a fitness company in Jacksonville? Lewer had never heard of them. She drove by Venture after work on July 15th to check it out for herself. Venture sold fitness equipment. It had a few bays, but no docks or loading ramps that were typical of TIC's contracted warehouses.For the next few days, Lewer examined her records to see if other non-approved warehouses had receivedshipments. She found E-Remarketing, owned by Nasser Kadkhodaie. Becoming suspicious, Lewer distinctly remembered Kennia mentioning Nasser as a close friend. Two unapproved computer resellers, who happened to be Kennia's good friends, had received TIC assets. Lewer decided to investigate E-Remarketing in person. Driving by the company, she saw it was in a little office with no sign on the door. It did not look like an appropriate location capable of receive large equipment deliveries. Why would Kennia violate company policy by overriding internal controls and selling computers to an unapproved remarketer—a related party who was a personal friend?Lewer then recalled other previously dismissed red flags. She remembered how Kennia would ask his End of Lease team and Lewer's Remarketing team to always notify him when large amounts of computer equipment were slated for return. He told her it was because he could make good deals for TIC. Lewer thought back to a July 13th event, just one day before the PGT phone call. Lewer received notice of a large computer shipment that was being returned by Regis High School. Since Kennia was out of the office, Lewer decided to research some TIC-approved remarketers. Kennia called Lewer at the office laterthat day to check in:Kennia:So, how is everything going back at the office? Any news?Lewer:Things are going great. Actually, we expect a shipment of computers back from Regis High School. I have started looking into a few remarketers that might sell these for us.Kennia:A new shipment? How big?Lewer:It's pretty big—about 50 computers.Kennia:Ok, listen. I will handle this contract when I get back, ok?Lewer:I do not mind doing this one. I know you are busy. I can handle this.Kennia:No. Do not do anything with these contracts. I will personally take care of them, ok?Lewer:Ok ...Lewer remembered feeling dissatisfied with this conversation, believing she could handle this account. Why was Kennia so reluctant to let her deal with it? She continued to research remarketers. The next morning, just hours before the PGT phone call, Lewer found a sticky note on her desk from Kennia and a copy of the Regis High School lease. Attached to the top of the lease was an E-Remarketing business cardthat said, “Nasser has the better deal now.” But Lewer did not believe that Kennia had sought bids from
anyone other than his friend Nasser. Kennia was out of the office. How could he have negotiated with multiple companies in such a short time?Continuing her research to find other laptop purchasers, on July 16th, she decided to offer the computers to Dauer Business Services, based in Chicago. They had contacted Lewer previously, looking for off-lease equipment to resell. Lewer sent them an email pricing offer request for the described equipment. Dauer offered her $240 per laptop. When Kennia returned to the office on July 19th, Lewer asked what Nasser was offering. She remembered this conversation vividly:Lewer:You left a note on my desk saying that Nasser has the best deal for the Regis High computers.I was wondering, just how much is he willing to pay?Kennia:He is willing to pay more than any of our other remarketers. That's why I am letting E-Remarketing have this deal.Lewer:But how much will he pay per laptop?Kennia:Oh, I do not have the exact figure off the top of my head.Lewer:How about an estimate?Kennia:Um, let's see ... it was ... Nasser will pay us $225 per laptop.Lewer:$225? Well, I contacted Dauer, and they gave me a better offer—$240 per laptop. That's $15 more than Nasser's offer. I am going to give them the deal instead of E-Remarketing.Kennia looked surprised, but did not protest. Dauer was not an authorized remarketer either, but Lewer did not think this would be a problem. She would occasionally see computers sold to remarketers not on the TIC approved reseller list. Previously, she did not think to question this deviation from company policy. Kennia ran the office, so Lewer assumed that this was normal. Lewer sighed. Why had she not asked more questions while she was training? Why have a pre-approved reseller policy if no one checked to verify that it was followed?After visiting Venture Fitness and E-Remarketing, Lewer realized that those locations could not be appropriate resellers to receive TIC equipment. Lewer wanted an explanation of why Kennia sent computers there, so later that day she went back to see him. She took the faxed copy of the return authorization from PGT to Kennia's office. She placed the fax on his desk.Lewer:I have a question. I received this fax from PGT indicating that you wanted them to ship their computers to Venture. Why would you instruct them to ship to this reseller?Kennia:PGT? Oh, I took care of that already. It's done. Do not worry about it.Lewer:Well, Venture is not on the list of approved remarketers.Kennia:So? We do not only sell to resellers on that list. How many times have you seen me use a different reseller? I go with whoever has the best deal.Lewer:But Venture is not even a remarketer. It sells fitness equipment. And I have not seen any checks coming in from Venture for any sold computers.Kennia:Oh, well, they ... uh ... I will look into that and see why that is.Lewer:What is going on?Kennia:You do not want to know about it.Lewer:What do you mean by that?Kennia:I mean do not worry. We will get our money by month end.Lewer:This month or next month?Kennia:Umm ... it should be here by next month ... Listen, I made a bad deal, ok? I already called the guy at Venture and I threatened to cut his arms off if he did not pay. So he will pay. Listen, you do not want to know what I do sometimes, but you will reap the benefits because I bring in a lot of money. So do not worry about what I do. Shannon did not worry about it. She just let me do my job. I
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TIC Internal Control Case - Fraud and Red Flagslg...