NCI announces internal investigation

NCI, Inc. of Reston, VA announced on January 23 that, based upon preliminary findings, it has discovered that its controller, acting alone, embezzled money from the company. The employment of the controller has been terminated, and the company has commenced an internal investigation with the help of outside counsel and forensic accountants.

While the investigation is ongoing, the company believes that its former controller embezzled approximately $18 million over the last six years. NCI is working with legal counsel and cooperating with federal authorities to determine the best course of action from a legal, regulatory and recovery perspective, and will provide further information as soon as practicable. NCI believes that after direct recovery from its former controller and after giving effect to available insurance coverage, it will be able to recover a large portion of the embezzled funds.

Of the estimated $18 million of embezzled funds, the company believes that approximately $5 million was taken during 2016 and the remaining $13 million was taken over the prior five years. The company’s preliminary findings indicate that these funds were reflected as expenses in the company’s financial statements. These expenses were treated as allowable indirect costs on its government contracts but should have been classified as unallowable costs. The company has concluded that the unaudited interim financial statements for the nine-month period ending September 30, 2016, contain material errors related to the theft in that period. Therefore, the unaudited financial statements contained in the company’s Quarterly Reports on Form 10-Q for the first three quarters of 2016 should not be relied upon by investors. As part of the completion of its financial reporting process for the fiscal year 2016, the company will provide amended financial results for that nine-month period.

The company has performed a preliminary analysis of the financial effect of the estimated $13 million in theft losses incurred in years before 2016. Based upon preliminary findings, the company believes that it is unlikely that there are any material misstatements relating to the embezzled funds in the financial statements for fiscal years 2015, 2014 and 2013. At this time, the company is not aware of any other possible misstatements in the financial statements. If any material errors are discovered through the active investigation and forensic analysis, the company will make timely disclosure at that time.

In addition, as part of the investigation, the company is reviewing its internal controls over financial reporting. Although the investigation is ongoing, the company believes that material weaknesses existed in its internal controls during the relevant periods during which the embezzlement occurred. As a result of these weaknesses, investors, analysts and other persons should not rely on management’s reports on internal controls over financial reporting or the company’s independent registered public accounting firm’s audit reports on the effectiveness of the company’s internal controls over financial reporting filed with the company’s Form 10-K for the fiscal year ended December 31, 2015. The company is implementing steps to strengthen its internal controls and to remediate the weaknesses that it has identified.

Source: NCI, Inc.