Fraud Podcast: Too Close to the Sun

All Things Internal Audit: Fraud Podcast
"Too Close to the Sun"

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 here.

Interested in more fraud-related topics? Earn CPEs by registering for The IIA's Fraud Analytics for Internal Auditors Certificate, online and in-person.

Chapters:

• Introduction to the Case (00:00:01)
• Part 1: Setting the World on Fire (00:00:23)
• Part 2: Burning Money (00:01:57)
• Part 3: Going Down in Flames (00:04:08)

Resources Mentioned:

 

• Association of Certified Fraud Examiners (ACFE)
  

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Episode Transcript

(00:00):
Hello.
I'm Grant Walstrom, contributing editor
to Internal Auditor magazine's fraud department
and Senior Manager of Fraud Forensics
and Investigations at a DT in Boca Raton, Florida.
I'm pleased to introduce this episode
of Fraud on the All Things Internal Audit podcast,
which provides fictionalized accounts
a fraud based on actual events

(00:23):
Too close to the sun.
Due diligence. Failures leave a company with an array
of costly problems after it acquires a solar business.
Part one, setting the world on fire.
James Baker, a former roofer based in Austin, Texas,
founded Tan Solar in 2018 To capitalize on the green energy

(00:45):
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, 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 was struggling

(01:07):
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 team's concerns about summit's, lack
of experience in the solar industry,
Henry instructed his staff
to begin the process of purchasing.

(01:29):
Tan Henry was well known on Wall Street for his fast
and confident decision making.
Summit's. Years of acquisitions
and constant growth led Henry to believe he was infallible.
So with little due diligence, summit finalized the purchase
of Tan Solar for $1 billion.

(01:57):
Part two, burning money.
After the acquisition summit's Vice President of Operations,
Bob Welch was tasked with integrating Tan's operations.
When reviewing Tan's financial records,
he learned the company had sold solar systems to customers
who financed them through a small banking network.
The banks would extend loans to customers

(02:19):
and make payments directly to Tan.
If a customer defaulted on a 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

(02:39):
and county permits even worse.
Welch knew that Tan's acquisition price was based on
multiples of annual revenue and that tan booked revenue.
Upon completing a system installation,
a single solar system was worth about $30,000.
Each system installed without a permit
represented an overstatement of revenue

(02:59):
and acquisition price.
If Summit could not obtain all the permits
for the installed systems, it would need
to remove them from customer's roofs,
which would be tremendously expensive.
Welch reported these concerns to CAE Robert Soar.
The CAE knew that the overstated revenue could lead

(03:19):
to a restatement of earnings violations of US Securities
and Exchange Commission rules and potential fines.
Welch was considering his next steps when Soar
knocked on his office door.
He told Welch he had just received a call from the Georgia
State Attorney General's office,
which was investigating whether the solar business was using

(03:40):
deceptive sales practices.
Troubled by the allegation,
they began reviewing past regulatory inquiries.
To their surprise,
28 states had raised concerns about tan sales practices,
and Ohio was threatening criminal charges.

(04:08):
Part three, going down in flames.
Welch knew 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

(04:30):
to three questions.
What was the customer paying for a kilowatt of electricity?
Did the system have an unobstructed view of the sun?
How well was the house insulated?
Sales representatives were trained
to overstate a customer's cost per kilowatt hour
or not adjust their calculation for home shaded by trees.

(04:52):
Customers would buy these systems assuming they were saving
money, but the actual savings often fell short
of the sales pitch.
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.

(05:14):
In addition to address complaints about deceptive sales
Summit 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 Summit closed the solar business

(05:35):
laying off thousands of employees.
Its stock price lost half of its original value.
With Tan closing, the state's dropped their investigations.
Baker returned to his roots acquiring a national roofing
company, his first customer summit.
After all, someone had

(05:56):
to remove the solar systems from people's homes
and fix their damaged roofs.
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,

(06:19):
I I A 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 internal auditor dot the
iia.org for more fraud related resources,
including guidance and thought leadership from the I A

(06:40):
and the A cfe.
Visit the iia.org/acfe
fraud.