Fraud Examination - Case Study Example

Fraud Examination Introduction There are varied types of fraud under criminal and civil law such as tax fraud, false billing, false advertising, currency counterfeiting, forgery, health fraud, bank fraud, impersonation, insurance fraud, securities fraud and investment frauds among others as highlighted by Cohen (2005). Just as there are varied reasons why people commit fraud, there are strategies and mechanisms that can effectively be used to minimize or more importantly help prevent fraud. Samocuik et al. (2010) defines fraud as the deliberate deception done for personal interests and harms another person in the process. Fraud is considered criminal and also a violation of civil law. This forms the basis of this report, which seeks to answer questions based on case studies dealing fraud. Case Study 1 from Chapter 1 of the text (Abrecht et al., 2012, pp. 25-27) Among clues that caused Jane to suspect that fraud was involved is the inconsistency in the process of endorsing checks where some of the accounts payable checks did not have complete endorsement by the payees (Albrecht, et al., 2011). Although in some circumstances and in some organizations, there are tendencies for less-than-perfect endorsements for accounts payable checks. Jane could not be sure if it was such a case or if it was a serious case of fraud since the said payable checks were payable to dual payees, which required an endorsement of each payee, which was lacking and therefore she decided to post an audit comment about the same (Albrecht, et al., 2011). As highlighted by Albrecht et al. (2011), upon review with Gus Jackson, among other initial clues that suggested to Jane something was not right was when they discovered that all the endorsement in all the payable checks had similar handwriting despite the fact that the names were different. The other clue and suspicion was the fact that the paid checks were approved as rush payments. Additional clues were the lack of supporting documents for the payments. When Jane decided to find other payments made to the same payees, the endorsement to the paid checks were totally different from the suspicious checks, which meant the endorsement for the checks were made by two different people (Albrecht, et al., 2011). In addition, the signatures for the paid checks that had supporting documents matched signatures on file for the payees, which would indicate forgery of signature, which would suggest fraudulent activities in relation to the suspicious endorsements. It is important for fraud examiners to follow up on even the smallest inconsistencies since any form of inconsistency no matter how insignificant it may seem may be viewed as a red flag to fraud. Following even on the smallest inconsistencies is crucial since one can never know where the inconsistencies may lead to and therefore it is better to be sure about the inconsistency than to ignore it and be sorry about it later on (Hall, 2010). (Singleton & Singleton, 2010) defines inconsistencies as a set of events or situations, which are unusual or atypical in nature, and they deviate from the normal processes and activities. Inconsistencies signify that things are out of ordinary and may therefore require further examination. Vona (2011) suggests that following up on inconsistencies does not mean outright guilt or lack of it but it offers possible warning signs in relation to fraud. A fraud examiner should never ignore the slightest inconsistency since majority of frauds have tell tale signs of inconsistencies, which are often ignored. Therefore, noted inconsistency should be followed up to establish if fraud is committed or if the inconsistency is as a result of error. An examiner should follow an inconstancy with a suitable action and ensure they are able to distinguish an inconsistency as a result of fraud and an inconsistency due to a mere error. Among things that auditors may have been looking for to help identify possible suspects include searching for the elements that must be present for an employee to commit fraud which includes opportunity, perceived pressure, minimal chances of getting detected, rationalization in the mind of the fraudulent individual and justification of fraudulent behaviour and action (Vona, 2011). Identifying these elements is important because fraudsters have profiles similar to other people and one cannot know them by merely looking at them (Samocuik, et al., 2010). Based on the case, the perpetrator had three key elements which include access, opportunity and knowledge to commit the fraud, which identified Hank Duckworth as the fraudster since he had the access, he had financial difficulty and lived a short distance from where the payable checks were cashed which was collaborated by the convenience store manager (Albrecht, et al., 2011). Case Study 1 from Chapter 2 the text (Abrecht et al., 2012, pp. 63) Some of the fraud opportunities within Green Grass are that only one person, a trusted friend, is in charge of majority of important operations of the company including accounting and making important decisions on the scheduling the routes of all workers. The friend has the opportunity in terms of access to resources where he can easily indicate he has given certain amount of materials to employees when he has not and takes the additional materials for the unaccounted materials as noted by Albrecht et al. (2011). On the other hand, he can carryout fraud by colluding with any of the workers. Apparently, the organization has no internal controls to help detect or safeguard against fraud. All the eight employees in the company’s operations of providing lawn care using insecticides, fertilizers and weed killers are accessible to money as they collect it from customers they serve and they have the opportunity for fraud since they can easily overcharge the customers and keep the extra amount. In addition, they can serve certain number of customers and in their report indicate they served a lesser number than the actual number and thus, taking the extra money. Since they are also, in charge of loading and mixing the chemicals, an opportunity for fraud present itself where they can always adjust the measurements to ensure a particular amount meant to serve one customer, serves one or two more hence generating more money of which the additional amount charged goes to the employee. On the other hand, opportunity for fraud exist where both the friend and the workers can inflate the number of products needed and making a sell off from them without detection. Additionally, the four-man crew may fail to care for lawns already paid for and instead use the machines to work in other lawns, which they can get direct payment without the knowledge of the office/ company. There are symptoms of fraud within the company, which present themselves in terms of inconsistencies. Despite the company’s gradual growth and success and the steady rise in profits over the years, the previous year indicated an inconsistency where the revenues increased a marginal amount while the expenses increased more than they should as noted by Albrecht et al. (2011). There are lesser interactions between the company owner and the friend who manages the operations of the company. In addition, the workers have been finishing their routes late in the day than in previous years indicating they are working longer and serving more customers, which should translate to more profits than costs/expenses, which is not the case. Among symptoms to look for include a change in behaviour among his employees, a change in work schedules, an assessment of the internal control environment, and decline in cash balances. Other factors include financial transaction that makes no sense, excess number of expense items and supplies, a rise in purchasing inventory but no increase in sales and reduction in inventory as echoed by Hall (2010). Wells (2011) outline steps to be taken to ensure fraud does not occur to include developing and implementing internal controls to prevent and detect fraudulent behaviour, which entails developing a control environment, developing an effective accounting systems and establishing control procedures to minimize opportunity to commit or conceal frauds. Control procedures involve segregation of duties, developing system of authorizations, facilitating independent checks, implementing physical safeguards and ensuring effective documentation and record keeping as discussed by Albrecht et al. (2011). Apart from setting up effective internal controls, the owner should take charge in ensuring effective and efficient supervision and monitoring of all workers and all operations they are involved in. in addition, he should search for evidence of possible fraud and take necessary precautions. Case Study 2 from Chapter 3 the text (Abrecht et al., 2012, pp. 90-91) The selling of Derek to the client by the firm as SAP expert when in fact he was not only not trained about the software but also, he had no prior experience with the software is tantamount to fraud. Since the move was not only meant to earn the firm more money since Derek was a cheaper solution compared to the two managers and it was done without the knowledge of the client (Albrecht, et al., 2011). Primarily, the selling of Derek to the client as an expert when he was not and in the process earning the company some money qualifies as fraud. Since the whole situation contains the five element of fraud which includes representation about a material fact that is false, false representations made deliberately and knowingly, falsehood which is believed and acted upon by the victim and can cause harm to the victim as discussed by Rezaee & Riley (2009). The unpredictable well-dressed purchasing manager, Mike, generates employee red flags, which indicate possible involvement in fraud. Based on the purchasing manager, the red flags are clearly evident such as the change in lifestyle characterized by expensive suits, having the latest BMW model and offering consultants lunches when in fact the employee did not make enough money to have the mentioned luxuries as indicated by Albrecht et al. (2011). Mike, head of purchasing department opted to deal directly with the vendors and spent so much time with them and he categorically refused to take his vacation, which would suggest fear for detection when he is away on vacation. Mike portrayed behaviour, which could act as red flag such as he was easily irritated when asked reasonable questions and he bragged about his clothes to other employees (Hall, 2010). Kathy who runs the internal sales and shipping department portray red flags in cash and accounts receivable which is characterized by excessive number of returns of supplies. She makes orders on behalf of the client and ships the supplies to clients who without knowledge of foreplay, pays for the orders although others are keen enough to return them. As a single mother, probably uneducated and having possible financial problems, Kathy has both the pressure, which is in form of financial pressures, opportunity where she can send out supplies to unsuspecting clients in order to make her numbers at quarter’s end and she easily rationalizes and justifies her actions, which signify possible fraud. Case Study 2 from Chapter 5 the text (Abrecht et al., 2012, pp. 163-4) There are usually symptoms of fraud way before the actual fraud is discovered. Based on the case study, there are symptoms of fraud which might be evident to a fellow employee which includes a change in behaviour and lifestyle where an individual who seems not to earn as much suddenly flaunts expensive clothing’s, cars, jeweller, homes, watches and goes to expensive entertainment joints and becomes a member to expensive membership clubs (Wells, 2010). In addition, fraudulent individuals brag and boast of their affluence. Among other symptoms includes accessibility to large sums of money and the tendency for the perpetrators to collude with others to make the fraudulent activities successful. Fraud red flags also include perpetrators having numerous checking accounts. Effective prevention of future frauds at the company includes closer monitoring, supervision and tighter internal control (Silverstone & Davia, 2005). This approach will help to not only eliminate the opportunity for fraud but also help enhance the ability for the management to detect fraudulent activities. Nevertheless, allocating the vice president greater responsibility for balance sheets might provide them with the opportunity and access to fraud. Therefore, it is vital that external expertise in auditing is regularly called in to check for irregularities in the company’s technology spending. Jones had the opportunity to facilitate fraud since he had the knowledge on how he could fraud without detection by ensuring the orders were worth less than $1000 and therefore require no approval from the supervisor. Opportunity was presented by lack of strict supervision where the internal ordering system was loosely controlled. The fact that no approvals were required for goods worth less than $1000 made it easy for Jones to take goods and sell them off at a profit without detection (Albrecht, et al., 2011). The system controls were non-existent and it was difficult to detect fraud offering Jones and his colleagues an opportunity to carry out fraudulent activities. In relation to pressure as a component of fraud refers to being pressurized to meet deadlines or achieve personal gains. Jones participated in fraud owing to personal lifestyle pressure where he wanted to have the best of everything in terms of vehicles, house, and clothing and to have so much money at his disposal. The company has taken measures to prevent fraud by terminating Jones’ employment contract in order to punish his fraudulent acts and developing internal control systems to control costs. In addition, the company has ensured closer monitoring and supervision of expenses. The company can improve its preventive measures by developing a control environment, an effective accounting system and control procedures that make it hard to fraud without detection or to conceal fraud. In addition, the company needs to implement effective documentation and record keeping systems of all supplies as suggested by Rezaee & Riley (2009). References Albrecht, W.S. Albrecht, C.C., Albrecht, C.O., & Zimbelman, M.F. (2011). Fraud Examination. London: Cengage Learning. Cohen, F. (2005). Frauds, Spies, And Lies: And How to Defeat Them. Singapore: Fred Cohen & Associates. Hall, J.A. (2010). Accounting Information Systems. London: Cengage Learning. Rezaee, Z., & Riley, R. (2009). Financial Statement Fraud: Prevention and Detection. New York: John Wiley and Sons. Samocuik, M., Nigellyer, & Doody, H. (2010). A short guide to fraud risk: fraud resistance and detection. London: Gower Publishing, Ltd. Silverstone, H. & Davia, H.R. (2005). Fraud 101: Techniques and Strategies for Detection. Sidney: John Wiley & Sons. Singleton, T.W., & Singleton, A.J. (2010). Fraud Auditing and Forensic Accounting. Sidney: John Wiley and Sons. Vona, L.W. (2011). The Fraud Audit: Responding to the Risk of Fraud in Core Business Systems. New York: John Wiley and Sons. Wells, J.T. (2010). Legal elements of fraud. Pennsylvania: Pennsylvania State University. Wells, J.T. (2011). Corporate Fraud Handbook: Prevention and Detection. New York: John Wiley & Sons. Read More