Assessment 2: fraud examination: theory, practice, and methods

Write 4-5 pages in response to the items listed for each of the four case studies included in this assessment.

Introduction

The overriding responsibility of investigative accounting is detecting fraud and preventing it from happening now and in the future. Usually, fraud takes place in a social setting and has dire consequences for the economy, organizations, and individuals. It represents an opportunistic infection that spreads when greed meets the possibility of deception. Fraud is defined by the Association of Certified Fraud Examiners as “The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets” (Association of Certified Fraud Examiners, 2004, p. 1).

Can fraud be prevented? Fraud prevention must be implemented on a cost-benefit basis. This is a central theme of fraud prevention and risk management. What occurs when an organization is unable to prevent an incident or a rash of fraud incidents from happening? That should be a signal that the organization requires a fraud detection process. Fraud detection is related to enterprise risk management. An optimal fraud detection system includes a data-driven fraud detection model.

Reference

Association of Certified Fraud Examiners. (2004). 2004 Report to the nation on occupational fraud and abuse. Retrieved from http://www.acfe.com/uploadedfiles/acfe_website/content/documents/2004rttn.pdf

Preparation

For this assessment, you must analyze the four case studies and respond to the items listed for each case study. Reviewing the resources for this assessment will give you a good start toward preparing for the assessment.

Case Studies

Case 1

Stats Plus Company develops and sells a measuring and global positioning software package used by surveyors throughout the world. The software allows the users to connect to databases in such a way that the surveyors in the field can quickly and accurately calculate land dimensions and boundaries. Stats Plus uses a subscription model to market and sell its product. Subscribers pay a fee, which permits them to download and use the software for a year. After a year, they must pay a fee to re-subscribe. Otherwise, they no longer have access to the software.

Stats Plus was formed several years ago by three partners. Stats Plus has grown rapidly to have a current subscriber base of more than 15,000. Customers input their payment information into a secure web form on the Stats Plus site. One of the partners, Sean, wants an automated system to handle all customer transactions. He has found an open-source system that he likes. He wants to use an open-source system to allow for simplified modification in the future.

Sean is currently using the Thunder accounting system, which is also open-source. It handles all payroll and expense transactions. Sean uses the system to process revenues, but he must enter them manually in weekly batches. Open-source databases are used for all Thunder system data files. This facilitates integrating the Thunder system with online shopping carts and billing systems that also support open-source databases. Sean is evaluating four packages for open-source accounting and billing systems. In his evaluation, security is a major consideration. He wants to make sure that the systems are well protected against hackers.

You are hired as a forensic accountant to consult with Stats Plus. In relation to this scenario, write responses to the following questions:

How would you suggest evaluating the open-source shopping cart systems that are being considered?
How does the open-source nature of the systems affect their security?

Case 2

The No-Meat-Buffet Restaurant is a vegan restaurant that offers vegetarian dishes and soy-based protein entrees. Diners are given cafeteria trays and plates for their trips through the buffet line.

There is a fixed price for the buffet for which a customer is entitled to a single trip through the buffet line. Return trips through the buffet line are not allowed unless the customers pay again. Customers have the option to purchase a beverage at an additional cost. Customers who purchase beverages are given plastic glasses. Those who do not purchase beverages are given paper cups for water.

Barb Strauss, the buffet owner, has noticed that profits have been falling even though the customer count has been steady. After examining food costs, she has focused on the beverage service, where costs have risen.

Barb asked Carol Garland, the assistant manager, what she thinks might have caused an increase in beverage costs. Carol feels the problem lies in people taking beverages for which they have not paid. She has seen it many times.

In Barb’s mind, taking a beverage without paying for it is stealing. Carol agrees, but she doesn’t know how it can be prevented. There aren’t enough employees to watch the beverage service constantly. When staff members see a paper cup used for another beverage they politely remind the customer that there is an extra charge for a beverage. Barb wants a better way to detect beverage theft.

In relation to this scenario, write responses to the following:

Create a simple detection system that can be used to solve the problem of customers taking a beverage without paying for it.
What do you think is the optimal role for detection in this situation?

Case 3

Robert Edmonds is the newly-hired controller for Set-Fast Drywall Company. Set-Fast is a privately-held company owned by the same family for two generations. The company supplies drywall to contractors throughout a four-county area. Jason Casey is the CEO. Robert is the controller and Judy Vincent is the treasurer. There is also a front office staff of four, an operations manager, and a sales force.

Set-Fast Company sells to contractors on credit. Judy supervises the credit approvals and approves bill payments, collections, and writes checks and makes deposits. Robert has responsibility for the bank reconciliations, accounts receivables, and the accounting records in general, including preparing and issuing the financial reports.

When Robert reviewed last month’s bank statement, he found it was out of balance by $2,404.35. Soon after this discovery, Jason called Robert to say the Set-Fast bank account was overdrawn by $13,000. Soon Jason showed up in Robert’s office asking for the bank statement.

Back in his office, Jason reviewed the current month’s combined bank statement and began looking through canceled checks. One check for $5,700 paid to a Phil Rogers caught his attention. Jason knew all the company’s vendors and Phil Rogers wasn’t one of them.

The endorsement on the back of the Phil Rogers check showed that the check had been deposited into an Illinois bank account. Jason soon discovered several other checks paid to Phil Rogers. This was a red flag. No vendor was ever paid more than once a month.

Jason picked up the phone to ask Robert about Phil Rogers. Robert said they needed to talk to Judy because she pays the vendors.

Jason didn’t want to talk to Judy immediately. He told Robert that they needed to do a complete audit of Judy’s office. He also wanted a hidden video camera set up to record everything that goes on in Judy’s office.

Robert thought it was possible that someone in Judy’s work group had stolen the checks. Jason felt that was unlikely because Judy keeps the checkbooks locked up at all times. Only Jason and Judy have access to them.

Robert agreed to begin an investigation. In relation to this scenario, write responses to the following:

Evaluate how well Jason and Robert have handled the problem.
Evaluate Set-Fast Drywall’s internal control processes as they apply to this case.

Case 4

Stephanie Adkins is an accountant who is trained in forensic accounting. She is an experienced fraud investigator. She was recently hired by Lake Side Hotels, a closely-held corporation, to investigate a company manager who is suspected of taking kickbacks from vendors.

Stephanie gave Lake Side her standard engagement letter stating that the scope of the engagement would be limited to investigating only one suspect. It did not guarantee findings or results.

According to the provisions of Stephanie’s engagement, she was to communicate directly with Bernie James, the company’s controller, and Amanda Peterson, the outside attorney.

At the first meeting of this team, Bernie indicated that Lake Side had received four separate anonymous tips about possible kickbacks. All the tips indicated that Laurie Miller, an evening manager, was taking kickbacks from food vendors. One tip named a particular vendor, the Mid States Beef Source, a company that supplies meat to the hotel’s restaurants.

Stephanie asked if Bernie had any documentation that supports Laurie Miller’s possible involvement in kickbacks. Bernie had no documentation but hoped Stephanie could help them substantiate the information from the anonymous tips. He was concerned that kickbacks would hurt the hotel financially.

Amanda, the outside attorney, said that she had already talked to several hotel employees and was convinced that Laurie was guilty.

Kickback schemes can be difficult to uncover, so Stephanie wanted to proceed cautiously.

Bernie wanted to confront Laurie immediately. He was convinced she would confess if he told her that he had evidence against her.

Stephanie asked what evidence Bernie had. Bernie said, “Only the anonymous tips, but I know she will confess if we bluff.” It was against Stephanie’s professional principles to lie and she said so.

“Detectives do it all the time on cop shows,” Bernie said. Stephanie insisted she would need to run the investigation her way or she wouldn’t be able to undertake this engagement.