May 2016

Vendor billing schemes can occur in any industry, but two recent cases demonstrate the particular risks of the entertainment industry, which relies heavily on services whose actual delivery and consumption may be harder to track. A fraudulent billing scheme using a shell company can sometimes be accomplished with little more than a fictitious name and a payment destination.

The most recent case involves the Chief Digital Officer of Epix, a cable network that is a joint venture of Viacom, Lions Gate Entertainment and MGM.  The executive involved has been charged with wire fraud and identity theft for causing the company to enter into contracts with fake vendors via communications with personnel whose identities were either stolen or fake, purportedly for digital media services that were either never performed or were performed in-house by Epix employees.  The fake vendors who were allegedly controlled by the executive were paid in excess of $8 million over a five year period.  The fraud was only discovered when other executives tried to visit the physical offices of these fake entities.

HBO recently had a similar situation where a former talent relations executive admitted to diverting nearly $1 million in production funds to a phantom company she created.  In this case, the executive (i) used the name Shine Glossy, LLP to submit invoices for style and makeup services that were not actually provided to actors, (ii) sent them via the email address, and (iii) set up a company in her husband’s name with a bank account to deposit the checks.

A strong system of internal controls can minimize the risk of this type of vendor fraud and/or identify red flags to catch it when it occurs.  Important areas for consideration include overall segregation of duties, due diligence in accepting new vendors and monitoring vendor activity over time.

Recommended areas of inquiry prior to vendor acceptance include ensuring that the vendor has a legitimate tax ID, telephone number and physical address.  Ownership can be verified through publicly available business registration databases.  All such information can be cross checked against employee information to ensure there is no unknown crossover.  Vendors who are not already on a vetted and approved vendor list should warrant more attention before payment is issued.

Ongoing monitoring activities include trend analysis by vendor and expense type.  When a fake vendor invoice is provided, it is often for a necessary service that is being actually provided (and invoiced) by another vendor. Comparisons to budgeted amounts, benchmarking and ratio analysis can identify unusual expense levels or timing in a particular expense category.

These internal controls should be diligently applied.  Further, although the specific details might not be shared, employees should be aware that oversight is occurring.  This helps eliminate the “perceived opportunity” aspect of the recognized fraud triangle.  It is far better to deter fraud than to later catch it.

Fulcrum Inquiry performs forensic accounting services.