Listen to The IIA’s new Fraud Podcast brought to you by All Things Internal Audit. The Fraud Podcast provides fictionalized accounts of real-world frauds featured in Internal Auditor magazine’s Fraud department.
In this episode, Chief Audit Executive Robert Soar investigates Summit HVAC’s disastrous acquisition of Tan Solar. Rushed due diligence had missed unpermitted installations, deceptive sales tactics, and mounting legal troubles. Soar uncovers critical oversights, highlighting internal auditors’ role in preventing costly missteps.
IIA members can access the full article.
Interested in more fraud-related topics? Earn CPEs by registering for The IIA's Fraud Analytics for Internal Auditors Certificate, online and in-person.
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Hello, I'm Grant Wallstrom, contributing editor to internal auditor magazines, fraud department and senior manager of fraud, forensics and investigations at 80 T in Boca Raton, FL. I'm pleased to introduce this episode of fraud on the All Things Internal Audit Podcast, which provides fictionalized accounts of fraud based on actual.
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Events.
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Too close to the Sun's due diligence failures. Leave a company with an array of costly problems after it acquires a solar business Part 1. Setting the world on fire.
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James Baker, a former roofer based in Austin, TX, founded Tan Solar in 2018 to capitalize on the green Energy Trend, Tan quickly became one of the largest solar panel system providers in the US. But when Baker learned that federal government subsidies for solar power were expiring.
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He decided to sell the business. Baker heard through the Grapevine that summit HVAC and Plumbing, a publicly traded company that provided service throughout the US.
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West was struggling and needed to create a new division that would drive rapid growth. Baker decided to call Summit CEO Greg Henry about buying Tan Solar, and the two quickly came to an agreement. Despite his executive teams concerns about some, it's lack of experience in the solar industry, Henry instructed his staff to begin the process of purchasing.
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And.
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Henry was well known on Wall Street for his fast and confident decision making summits, years of acquisitions and constant growth LED Henry to believe he was in fallible. So with little due diligence, summit finalized the purchase of Tan solar for $1 billion.
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Part 2 burning money after the acquisition, summits Vice President of Operations Bob Welch was tasked with integrating tans operations when reviewing Tang's financial records. He learned the company had sold solar systems to customers who financed them through a small banking network.
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The banks would extend loans to customers and make payments directly to tan if a customer defaulted.
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Loan the bank would reclaim the payment from Tan. Welch discovered the banks were claiming a considerable number of payments from customers who had never made a single payment. He also learned that Tan had installed thousands of systems without completing the required city and county permits. Even worse, Welch knew that Tans.
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Position price was based on multiples of annual revenue and that TAN booked revenue upon completing a system installation.
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A single solar system was worth about $30,000. Each system installed without a permit represented an overstatement of revenue and acquisition price. If someone could not obtain all the permits for the installed systems, it would need to remove them from customers. Roofs, which would be tremendously expensive.
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Welch reported these concerns to CAE. Robert.
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Door the CAE knew that the overstated revenue could lead to a restatement of earnings violations of U.S. Securities and Exchange Commission rules and potential fines. Welch was considering his next steps when sore knocked on his office door. He told Welch he had just received a call from the Georgia State.
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Attorney General's office, which was investigating whether the solar business was using deceptive sales practices troubled by the allegation they began reviewing past regulatory inquiries, to their surprise.
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28 states had raised concerns about tan sales practices and Ohio was threatening criminal charges.
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Part 3 going down in flames.
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Welch New Tan maintained an ethics hotline and had recently learned that it had received hundreds of customer complaints alleging deceptive sales practices. Customers were told that buying a solar system would pay for itself. However, cost savings were actually based on the answers to three questions.
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What was the customer paying for a kilowatt of electricity? Did the system have an unobstructive view of the?
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Done. How well was the house insulated sales representatives were trained to overstate the customer's cost per kWh or not adjust their calculation for homes shaded by trees. Customers would buy these systems assuming they were saving money, but the actual savings often fell short of the sales pitch.
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Welch's investigation concluded that Tan had installed hundreds of systems without permits. The cost of removing those systems resulted in a massive financial loss for summit in its first year of operating the business.
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In addition to address complaints about deceptive sales, some had instituted sales practices that disclosed the actual cost and savings. Unfortunately, this revealed that the solar systems were not cost effective for many customers, leading to fewer sales the result.
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Summit closed the solar business, laying off thousands of employees. Its stock price lost half of its original value, with tan closing, the states dropped to their investigations. Baker returned to his roots, acquiring a national roofing.
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Company his first customer summit.
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After all, someone had to remove the solar systems from people's homes and fix their damaged roofs.
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This has been the all things internal audit fraud podcast. Fictionalized accounts based on actual events brought to you by the Institute of Internal Auditors.
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IA members can access the full story in this month's issue of Internal Audit magazine, including bonus materials on lessons learned to read more, visit internalauditor.theia.org for more fraud related resources, including guidance and thought leadership from the.
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IA and the ACC AFE visit theia.org/ACF E fraud.
