Accounting Company Evidence Collection Case Study

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timer Asked: Feb 3rd, 2019
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Question Description

Complete the following problems, which will help you apply your knowledge of detecting a potential fraudulent activity:

  • Case 50 on page 243.
  • Case 51 on page 245.

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 50. 

The Green Natural Wellness Company, aka GNWC, sells select,
high-end nutritional and health and beauty products to small health food stores
throughout the United States. Its headquarters and warehouses are located in
Clear Lake, Texas, only a couple of miles from the NASA Space Center. 

GNWC's key success factor is its ability to quickly bring to
market new products before other suppliers do. The company has two full-time
buyers who spend all their time traveling around the world in search of unique
“nutraceuticals.” For example, one of the buyers recently discovered that when
a common plant in the Brazilian rain forest is mixed with natural emollients,
the result is a cream that eliminates even the most difficult cases of acne.
After the discovery, GNWC took only six weeks to bring the product to market. 

GNWC has four sales divisions that report to the vice
president of sales: skin care, hair care, nutritional supplements, and dried
foods. Each division operates autonomously with its own revenue and expense
budgets. The controller's office reviews and approves all divisional budgets. 

Barbara Larkin is the head of the skin care division. In
recent years, her division has done spectacularly well with annual sales growth
rates averaging in the 20 percent range and the most recent quarter's sales
being just over $4 million. 

Until several years ago, Barbara's division was so
independent that it managed its own collections of accounts receivable,
although it forwarded all incoming customer checks to the central finance
division for deposit, and all purchase orders had to be approved by the finance
division before being forwarded to the purchasing division for additional
approval. 

About two years ago, Barbara decided to turn over the
collection of customer accounts to the collections department in the finance
division. Because of the rapid growth in her skin care division, there was a
shortage of staff, and she was having a difficult time keeping up with
collections. Things were so bad that she wasn't even able to get good aging
reports. 

Martin Mouse runs the collection department in the finance
division; he is an up-and-coming star in the company. Rumor has it that he's in
line for the vice presidency of finance as soon as the existing VP retires or
leaves the company. Furthermore, he's a cousin of the CEO, so no one wants to
get on his bad side. 

Under both the present and past system, Barbara's division
has a single master budget account used for crediting all the division's
incoming cash receipts and charging the division's payments. As a result, the
master account should effectively reflect the balance in cash funds available
to the division. 

Barbara has been having problems with Martin over the last
year. First, he has been asking Mac Plata, the controller, to use his influence
to permit Martin to charge Barbara's division 7 percent of it's revenues for
the collection services. That fee would Page 244have a seriously detrimental
effect on Barbara's master account and would hinder her ability to continue to
grow. Second, Martin's collection department has not been doing a good job with
Barbara's collections, especially in sending out bills on time and dealing with
overdue accounts. 

The problem with the collection efforts is that Martin
periodically shifts his staff's efforts to the dried foods division and doesn't
give proper attention to the skin care division. The obvious reason for this is
that Betty Riley, the head of the dried foods division, has been with the
company since it was founded 15 years ago. She regularly eats lunch with the
CEO and knows everyone in the company, so Martin wants to win her favor in the
hope of furthering his climb to the finance position. 

Barbara is very careful with her division's budgets and her
management of its master account. Because her division operates as an
investment center, she maintains at least a $1 million balance in the master
account at all times as a safety net. She needs this money to be available in
case there is a sudden interruption or downturn in sales so that she could
continue to operate and pay employees until she could resolve the sales issue. 

On the first day of a new month, Barbara reviewed the
balance in her master account; it was about $2.3 million. Following her normal
practice, she attempted to reconcile this against her internal sales records.
She couldn't reconcile the balance against actual cash receipts because
Martin's collections department handles and processes all receipts.
Furthermore, Barbara had to estimate collected sales because sales collection
reports were about three months behind in the system, thanks to the fact that
Martin inputs all collection data into spreadsheets and forwards them only
sporadically to the accounting department. 

Barbara took the beginning balance in the master account,
subtracted new expenses (which she knew because she has to submit purchase
requisitions and payroll authorization), and then added an estimate of newly
collected sales. She had a pretty good idea of what the collected sales should
be because when she handled her division's collections, 95 percent of accounts
receivables were collected within 30 days of billing. 

Barbara checked and rechecked her calculations. The balance
in her master account should have been about $1.1 million, not $700,000 as the
system reported. That meant that her account was short about $400,000. 

Being a little afraid of Martin and mindful of their
argument over the collection department's charging for her services, Barbara
caught him in the hallway and casually asked him to look into the matter. She
didn't immediately blurt out her request but inserted it into a casual
conversation regarding an injury accident that had occurred in the warehouse
the day before. 

Over the following week, Barbara again mentioned the issue
on the phone with Martin, but he seemed totally uninterested in helping.
Finally, Barbara called him again and told him that if she didn't get an answer
in one day, she would have to report the issue to Martin's boss, the VP of
finance. 

Barbara was absolutely sure that the $400,000 had
disappeared. She was afraid that Martin had been embezzling incoming receipts.
Furthermore, regardless of what happened to the missing funds, Martin had the
responsibility for keeping up with collections and should have been able to
explain what happened to the missing funds. 

The next morning Barbara received a call from Myrna Wilson,
the secretary to Victor Vaccio, the VP of finance. Myrna spoke as if Barbara
were in trouble: 

“Mr. Vaccio considers this to be a serious problem. He's
looking into it.” 

Barbara was a little shaken because she hadn't even reported
the problem yet. 

Barbara had friends in various places in the company. One
friend, who works in the assistant controller's office, told her that Martin
was telling Victor and everyone else that Barbara had overspent her budget in
the previous quarter. 

Barbara then received an e-mail from the CEO's secretary
advising her that her master account was frozen and that Victor must personally
approve any expenditures except for continuing payroll. The CEO himself had
told Victor to conduct a complete investigation. He wanted a complete audit of
all sales and collections beginning with the previous quarter. 

Barbara was stunned. The CEO had swallowed Martin's story
about Barbara's having overspent her budget in a previous period, hook, line,
and sinker. And Martin was doing the audit. 

To make things worse, Barbara's sales analysis and
reconciliation to her master account made her sure that the money had
disappeared in the current quarter, not in the previous one. That meant that
the investigation would go nowhere for some time, and in the meantime, her
budget would remain frozen, and she would have to live with the embarrassment
and disgrace that come with being suspected of irresponsible financial conduct. 

Barbara called Martin and offered her help in locating the
missing funds, but he refused. “I've been instructed to keep our investigation
independent,” he said. “Sorry, but this means we can't use any outside help.” 

a. From a process standpoint, evaluate how well
this investigation began to unfold. 

b. Should Barbara have done anything differently? 

c. What changes, if any, would you recommend be
made to the system? 

51. 

Gabriela Pearson is a professionally certified independent
forensic accountant. She has more than 20 years of experience investigating
fraud and has testified numerous times in both state and federal courts in both
civil and criminal cases. She was recently hired by WindSand Hotels, a closely
held corporation, to investigate a company purchasing officer who was suspected
of taking kickbacks on purchases. 

Gabriela gave WindSand her standard engagement letter with
the scope of the investigation to be limited to investigating the one suspect.
It promised no guaranteed findings or results. 

She deal directly with Sam Markoff, the company's
controller, and Joanna Rodriguez, the outside attorney. Gabriela was working
under attorney-client privilege. 

At their first get-to-work meeting, Sam said, “We've had
three different tips from our Web site about this. All three were short
messages that simply said Tania Perez, our main purchasing agent, was taking
kickbacks from our suppliers. One tip even named a particular supplier, the
Whole Coast Seafood Supply, a company that supplied fresh and frozen seafood to
our restaurants.” 

Gabriela responded, “Any documentation that supports her
involvement in this?” 

“Not yet,” said Sam. “That's why we hired you. If she's
selling us out under the table, it could be costing us a fortune.” 

Joanna, the outside attorney, jumped into the conversation.
“I've already talked to several employees about Tania Perez, and I'm convinced
that she's guilty. I heard from one reliable employee that one of your
suppliers paid for her vacation on a Caribbean cruise ship. And there are
rumors that she had bank accounts in the Cayman Islands and Brazil.” 

Gabriela thought about the situation. She knew that kickback
schemes were difficult to break. 

“Don't worry,” said Sam. “I've known her since she was a
little kid. She'll confess if we confront her and tell her we have the evidence
against her.” 

“What evidence is that?” asked Gabriela. 

“All we have to do is bluff,” said Sam. “I know her. She'll
buckle right away. All she needs to do is believe that a forensic accountant
has the goods on her.” 

“It's against my ethics to lie to suspects,” said Gabriela. 

“But the police lie all the time to catch suspects, don't
they?” asked Sam. 

“You'll have to let me run the investigation,” said
Gabriela. 

a. What steps might Gabriela follow to proceed with
her investigation? 

b. What mistakes, if any, have already been made in
the investigation?  

Unformatted Attachment Preview

50. The Green Natural Wellness Company, aka GNWC, sells select, high-end nutritional and health and beauty products to small health food stores throughout the United States. Its headquarters and warehouses are located in Clear Lake, Texas, only a couple of miles from the NASA Space Center. GNWC's key success factor is its ability to quickly bring to market new products before other suppliers do. The company has two full-time buyers who spend all their time traveling around the world in search of unique “nutraceuticals.” For example, one of the buyers recently discovered that when a common plant in the Brazilian rain forest is mixed with natural emollients, the result is a cream that eliminates even the most difficult cases of acne. After the discovery, GNWC took only six weeks to bring the product to market. GNWC has four sales divisions that report to the vice president of sales: skin care, hair care, nutritional supplements, and dried foods. Each division operates autonomously with its own revenue and expense budgets. The controller's office reviews and approves all divisional budgets. Barbara Larkin is the head of the skin care division. In recent years, her division has done spectacularly well with annual sales growth rates averaging in the 20 percent range and the most recent quarter's sales being just over $4 million. Until several years ago, Barbara's division was so independent that it managed its own collections of accounts receivable, although it forwarded all incoming customer checks to the central finance division for deposit, and all purchase orders had to be approved by the finance division before being forwarded to the purchasing division for additional approval. About two years ago, Barbara decided to turn over the collection of customer accounts to the collections department in the finance division. Because of the rapid growth in her skin care division, there was a shortage of staff, and she was having a difficult time keeping up with collections. Things were so bad that she wasn't even able to get good aging reports. Martin Mouse runs the collection department in the finance division; he is an up-and-coming star in the company. Rumor has it that he's in line for the vice presidency of finance as soon as the existing VP retires or leaves the company. Furthermore, he's a cousin of the CEO, so no one wants to get on his bad side. Under both the present and past system, Barbara's division has a single master budget account used for crediting all the division's incoming cash receipts and charging the division's payments. As a result, the master account should effectively reflect the balance in cash funds available to the division. Barbara has been having problems with Martin over the last year. First, he has been asking Mac Plata, the controller, to use his influence to permit Martin to charge Barbara's division 7 percent of it's revenues for the collection services. That fee would Page 244have a seriously detrimental effect on Barbara's master account and would hinder her ability to continue to grow. Second, Martin's collection department has not been doing a good job with Barbara's collections, especially in sending out bills on time and dealing with overdue accounts. The problem with the collection efforts is that Martin periodically shifts his staff's efforts to the dried foods division and doesn't give proper attention to the skin care division. The obvious reason for this is that Betty Riley, the head of the dried foods division, has been with the company since it was founded 15 years ago. She regularly eats lunch with the CEO and knows everyone in the company, so Martin wants to win her favor in the hope of furthering his climb to the finance position. Barbara is very careful with her division's budgets and her management of its master account. Because her division operates as an investment center, she maintains at least a $1 million balance in the master account at all times as a safety net. She needs this money to be available in case there is a sudden interruption or downturn in sales so that she could continue to operate and pay employees until she could resolve the sales issue. On the first day of a new month, Barbara reviewed the balance in her master account; it was about $2.3 million. Following her normal practice, she attempted to reconcile this against her internal sales records. She couldn't reconcile the balance against actual cash receipts because Martin's collections department handles and processes all receipts. Furthermore, Barbara had to estimate collected sales because sales collection reports were about three months behind in the system, thanks to the fact that Martin inputs all collection data into spreadsheets and forwards them only sporadically to the accounting department. Barbara took the beginning balance in the master account, subtracted new expenses (which she knew because she has to submit purchase requisitions and payroll authorization), and then added an estimate of newly collected sales. She had a pretty good idea of what the collected sales should be because when she handled her division's collections, 95 percent of accounts receivables were collected within 30 days of billing. Barbara checked and rechecked her calculations. The balance in her master account should have been about $1.1 million, not $700,000 as the system reported. That meant that her account was short about $400,000. Being a little afraid of Martin and mindful of their argument over the collection department's charging for her services, Barbara caught him in the hallway and casually asked him to look into the matter. She didn't immediately blurt out her request but inserted it into a casual conversation regarding an injury accident that had occurred in the warehouse the day before. Over the following week, Barbara again mentioned the issue on the phone with Martin, but he seemed totally uninterested in helping. Finally, Barbara called him again and told him that if she didn't get an answer in one day, she would have to report the issue to Martin's boss, the VP of finance. Barbara was absolutely sure that the $400,000 had disappeared. She was afraid that Martin had been embezzling incoming receipts. Furthermore, regardless of what happened to the missing funds, Martin had the responsibility for keeping up with collections and should have been able to explain what happened to the missing funds. The next morning Barbara received a call from Myrna Wilson, the secretary to Victor Vaccio, the VP of finance. Myrna spoke as if Barbara were in trouble: “Mr. Vaccio considers this to be a serious problem. He's looking into it.” Barbara was a little shaken because she hadn't even reported the problem yet. Barbara had friends in various places in the company. One friend, who works in the assistant controller's office, told her that Martin was telling Victor and everyone else that Barbara had overspent her budget in the previous quarter. Barbara then received an e-mail from the CEO's secretary advising her that her master account was frozen and that Victor must personally approve any expenditures except for continuing payroll. The CEO himself had told Victor to conduct a complete investigation. He wanted a complete audit of all sales and collections beginning with the previous quarter. Barbara was stunned. The CEO had swallowed Martin's story about Barbara's having overspent her budget in a previous period, hook, line, and sinker. And Martin was doing the audit. To make things worse, Barbara's sales analysis and reconciliation to her master account made her sure that the money had disappeared in the current quarter, not in the previous one. That meant that the investigation would go nowhere for some time, and in the meantime, her budget would remain frozen, and she would have to live with the embarrassment and disgrace that come with being suspected of irresponsible financial conduct. Barbara called Martin and offered her help in locating the missing funds, but he refused. “I've been instructed to keep our investigation independent,” he said. “Sorry, but this means we can't use any outside help.” a. From a process standpoint, evaluate how well this investigation began to unfold. b. Should Barbara have done anything differently? c. What changes, if any, would you recommend be made to the system? 51. Gabriela Pearson is a professionally certified independent forensic accountant. She has more than 20 years of experience investigating fraud and has testified numerous times in both state and federal courts in both civil and criminal cases. She was recently hired by WindSand Hotels, a closely held corporation, to investigate a company purchasing officer who was suspected of taking kickbacks on purchases. Gabriela gave WindSand her standard engagement letter with the scope of the investigation to be limited to investigating the one suspect. It promised no guaranteed findings or results. She deal directly with Sam Markoff, the company's controller, and Joanna Rodriguez, the outside attorney. Gabriela was working under attorney-client privilege. At their first get-to-work meeting, Sam said, “We've had three different tips from our Web site about this. All three were short messages that simply said Tania Perez, our main purchasing agent, was taking kickbacks from our suppliers. One tip even named a particular supplier, the Whole Coast Seafood Supply, a company that supplied fresh and frozen seafood to our restaurants.” Gabriela responded, “Any documentation that supports her involvement in this?” “Not yet,” said Sam. “That's why we hired you. If she's selling us out under the table, it could be costing us a fortune.” Joanna, the outside attorney, jumped into the conversation. “I've already talked to several employees about Tania Perez, and I'm convinced that she's guilty. I heard from one reliable employee that one of your suppliers paid for her vacation on a Caribbean cruise ship. And there are rumors that she had bank accounts in the Cayman Islands and Brazil.” Gabriela thought about the situation. She knew that kickback schemes were difficult to break. “Don't worry,” said Sam. “I've known her since she was a little kid. She'll confess if we confront her and tell her we have the evidence against her.” “What evidence is that?” asked Gabriela. “All we have to do is bluff,” said Sam. “I know her. She'll buckle right away. All she needs to do is believe that a forensic accountant has the goods on her.” “It's against my ethics to lie to suspects,” said Gabriela. “But the police lie all the time to catch suspects, don't they?” asked Sam. “You'll have to let me run the investigation,” said Gabriela. a. What steps might Gabriela follow to proceed with her investigation? b. What mistakes, if any, have already been made in the investigation? ...
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Ben95
School: University of Virginia

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