Marschdorf Forensics


The Intercepted Loan Fraud

A consortium of banks had been party to financial reorganisation negotiations with one of the Big 10 European construction enterprises headquartered in Vienna, Austria. They had acquired Eastern European construction companies and substantial real estate and apartment buildings after the iron curtain had come down, highly leveraged acquisitions. The debt burden was threatening to bring down the whole group of companies unless the consortium of banks agreed to a reduction of their loan claims and to infuse fresh funds into the group. With the fresh money, so the proposal, the group could have been put on safe footing again.

The consortium requested a due diligence investigation into the viability, completeness and correctness of the reorganisation plans proposed by the construction company. The numbers looked right, but were all risks disclosed and taken into account adequately? While at their Vienna Headquarters, the analysis first appeared to support the reorganisation calculations. The IT systems looked well integrated and fully networked using proprietary accounting software integrated with the company’s operations. The reorganisation plan agreed with the data available from accounting systems. Still, something did not feel right. The corporation had entered into joint ventures in Russia and had committed to construction of major housing projects. According to the accounting systems, this project was approaching completion. According to publicly available information, however, the completion date was later than what the percentage of completion calculations said.

During a walk through the premises we discovered an older model computer with no network connection in a small windowless office. It was switched off. When that computer was turned on, we found the financial status calculations and cash flow forecasts for the Russian joint venture. The numbers differed from the numbers used in the reorganisation plan showing an additional deficit and need for funds of approximately DEM 100 Million and a completion status materially different form what the accounting systems portrayed. This was in the mid-nineties and this amount was material even to a large construction enterprise. In a subsequent interview, the CEO confirmed the deficiencies of their reorganisation proposal. Such amount would have led to a need for new reorganisation talks within less than 6 months. The result would have been further write-downs.

The end was not happy for the construction company. The consortium of banks decided to end the reorganisation negotiations and the construction company filed for bankruptcy within two weeks thereafter. The consortium of banks, however, had managed to limit their losses by not infusing fresh funds, which would have only delayed bankruptcy, but not avoided it.