PPG, a Pittsburgh-based paint manufacturer, said Friday it plans to book between $80 million and $85 million in restructuring costs and lay off approximately 1,100 employees, a week after the company revealed it’s probing an accounting problem that had been uncovered through an internal reporting system.

“As PPG’s earnings release was being finalized, the company received a report through its internal reporting system concerning potential violations of PPG’s accounting policies and procedures regarding the failure to accrue certain specified expenses in the first quarter,” the company announced in its earnings release last Thursday. “Based on preliminary review, the company identified approximately $1.4 million of expense that should have been accrued in the first quarter, and the earnings reported in this release reflect the accrual of such $1.4 million of expenses. The report also alleges that there may have been other unspecified expenses, potentially up to $5 million in the aggregate, that were improperly not accrued in the first quarter. The Audit Committee of the company’s Board of Directors is overseeing an investigation of the matters set forth in the report, with the assistance of outside counsel. The company is currently unable to predict the timing or outcome of the investigation and will move with diligence.”

PPG spokesman Mark Silvey told Accounting Today the company is continuing to investigate the matter. “The Audit Committee of PPG’s Board of Directors continues to oversee an investigation of these matters with the assistance of outside counsel,” he wrote in an email Friday. “The company is currently unable to predict the timing or outcome of the investigation, but continues to move with diligence.”

Dr. Jennifer Stevens, an assistant professor of accountancy at Ohio University who used to do forensic accounting for Ernst Young in Chicago, noted this is the typical way for a company to investigate a complaint uncovered by a whistleblower.

“The way this came to light was there was a report received through its internal reporting system,” she said. “This is a very important piece of a company’s fraud prevention and protection system, similar to a whistleblower hotline. Many companies now will have not necessarily a hotline, but some sort of an internal reporting system that would run through the general counsel’s office that allows employees to report problems or issues within the company. Most frauds are actually uncovered through whistleblower activities such as these.”

She believes PPG will use a forensic accountant to investigate the matter. “It appears that in their first quarter earnings release they had disclosed that they found an accounting irregularity,” said Stevens. “Basically $1.4 million of expenses were not accrued for Q1. They ended up including those $1.4 million expenses in the Q1 results that they released. However, the issue could be up to $5 million of expenses that were not accrued in Q1. Apparently this came to light while they were finalizing earnings for the quarter, so it’s a fairly recent finding.”

Stevens isn’t surprised that PPG is relying on outside counsel to conduct the investigation after the tip came into the internal reporting system. “It’s some type of reporting system that the company has set up that would run through the general counsel’s office, most likely where employees anonymously or not anonymously report potential issues within the company,” she explained. “It’s important those systems are in place, and that they kind of bypass the management ladder because a lot of times, the person wants to be protected or they may be reporting on one of their superiors. You never really know how high up these issues could go, as far as who knew about them, so you want these to be reported to the general counsel’s office. Then what would happen is that the general counsel would probably retain outside counsel, and they would report it to the audit committee from the board of directors, and the audit committee and the board of directors are going to be the ones to actually hire the forensic accountants.”

She predicted how the forensic accountants might approach the investigation. “The forensic accountants should be engaged by the board of directors, specifically the audit committee within the board of directors,” said Stevens. “Those are all independent directors, because we want to bypass reporting to management. As a forensic accountant, the first thing you want to do is to go in and secure the evidence by taking forensic images of individuals’ computers who may have been involved or maybe had access to the accounting system. That way we could get access to their email, to their internet activity and also their access to the financial reporting systems.”

After the forensics team ensures the evidence is secure, the next step is to make backup copies of the records. “We also get server backups in case certain items might have been deleted,” said Stevens. “We would want to get electronic copies of the financial reporting system, and at that point in time we would also want to collect any appropriate documentation. So you would want to secure all this evidence before anyone had an opportunity to manipulate it. Once you secure all the evidence, obviously you would want to restrict access to that evidence and make sure that people can’t go back in and make any changes.”

The next step is interviewing people who may have played a role. “Then we would probably start investigating around the specific allegations to look at the potential scope of the issue,” said Stevens. “We would do that through conducting interviews with those who would have had access to the system who may be involved. We would then look through the financial reporting system to see the roadmap of how these expenses did not get accrued that should have been accrued. As we’re considering the investigation, we’re also thinking about what were the incentives behind this. Were there certain individuals that were facing pressure because they had some type of performance evaluation or monetary bonus that might be tied to an earnings release?”

The outside auditing should also be taken into account. In PPG’s case, it’s PricewaterhouseCoopers. “The auditor’s job is to make sure the financial statements are not materially misstated,” said Stevens. “The auditors audited 2017. They didn’t audit Q1 2018, so I can’t say the auditors would have had an opportunity to catch this because they don’t audit the quarters. They review them. How this came to light was through the whistleblower, but from a forensic accounting perspective, when we do an investigation, of course we want to make sure it’s limited to this one instance in this one quarter.”

She anticipates PwC will “shadow” the work of the forensic accounting team, but the forensics team will probably come from another firm. “They will definitely be notified of it, and most of the time the auditor will end up shadowing the forensic accountants,” said Stevens. “The forensic accountants in a situation like this are most likely not going to be from the audit firm because the audit firm needs to maintain its independence. PPG has most likely hired an outside forensic accounting firm, and then because this could potentially be fraud, the auditor will follow or shadow the forensic accounting firm in many cases, because the auditor needs to make sure that the internal controls are sound around the financial reporting system. This is something they would definitely be concerned with, but they wouldn’t be the ones to actually be investigating this potential accounting violation.”

PPG’s spokesman could not provide the timing of when the investigation will be completed, but the company is probably hoping it will be wrapped up soon. “I would say if the news comes sooner rather than later, that’s usually a good sign because that means it was a small isolated incident,” said Stevens. If we don’t hear anything for a while, I would say that it might not be great news.”

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