The case study identifies the fraud risk factors with the help of forensic audit and analysis. The services of forensic auditing firm are hired to identify the risk factors of the fraud that has a probability to take place in the organization. The company internal systems are not very stringent, and the duties are not well defined. The company is facing lack of job segregation and a lot of multiple tasking, where one or two people perform key jobs. Thus increasing the chances if frauds to take place. The senior executives have employed their relatives in jobs, further creating the possibility of fraud in the company. The company also lacks the controls on organization’s activities. Key data is provided to the forensic auditors so that they can carry the audit. However, the auditors can broaden the horizon of their audit for deep analysis of the risk factors that can cause a fraud.
A Florida based company, Tallahassee BeanCounters (TBC) is involved in the sports activities with minor baseball league. The company has never conducted an audit in the past. However, the owner of TBC has obtained the services of a forensic auditor to analyze the probability of any fraud in the company. The owner’s apprehensions aroused due to an anonymous mail.
In a forensic audit, the auditors used various audit techniques to verify that the proper methods and legalities were followed to carry the true business values. Further, this is also analyzed that the financial statements were made in accordance with the business ethics and any possibility of fraud is also analyzed. The auditing firm is different from a statutory audit on the basis of the following basis:
Forensic auditing objective is to legally analyze the fact that whether a fraud has occurred. Also, it aims in disclosing the names of the person involved in the fraud (in order to take legal action)(George A. Manning, 2010).
Financial auditing is defined as audit of all the transactions taking place in an organization. It verifies that the transactions are recorded properly and proper reporting of them is carried. Moreover, it also checks that whether or not the company has obtained any benefit arising from not presenting a true picture of the accounts. (Singleton, 2010).
SUSPECTED FRAUDULENT AREAS
In the current era, the employees have various means and ways to commit fraud. The current environment of business is such that it gives a great opportunity for a person with malafide intention to commit fraud. Mr. Phil Ackers, President TBC is taking a lot of tasks on behalf of the owner Mr. Franklin Kennedy. Hence, Mr. Phil Ackers can easily commit fraud as he is acting as an agent for the owner. He is responsible for raising funds and the supervision of construction. Hence, he could use the funds raised for the construction of a training center for his personal use.
Ms. Julie, the niece of Mr. Acker, is also working in the organization as his assistant. Mr. Kennedy has also removed some independent checks on his business-related activities. Therefore, if Mr. Acker is engaged in any fraud than his niece will be reluctant to provide the owner with any clue. Hence, both of them with consent can easily conceal the fraudulent activity. The forensic auditors should foresee all these factors to ensure the fraud to do not occur.
Julie has a responsibility to manage the sales and receivables. She can also easily camouflage these two tasks. She can show fake sales to customers and can also use the stock for her own use. Lack of control can facilitate her in doing fraud. Hence, her job duty should also be checked, and proper recording should be ensured. These are the control weaknesses that the forensic auditors should investigate further.
Mr. Acker, President, and his Julie are also responsible for sales and fund raising. They can easily use the funds raised and sales of the company for their personal use. The presence of relatives in such jobs were both of them are performing high-risk duties can be problematic for the company. Due to lack of controls and checks, they can easily hide this from others.
Julie is also managing the stock. Her activities are very doubtful as she counts the stock at the end of the month. As she is the one who is managing and verifying the stock then it’s very easy for her to take goods for her personal use. All these fraudulent activities can be easily hidden from the management.
The same is the situation with the purchasing department where lack of effective control is seen. The purchase manager can easily order the goods for its use on the company’s behalf. The control weakness is such that the purchasing decision is not centralized and anyone can order the purchases. Hence, the forensic auditors must ensure that these control weaknesses are addressed properly.
The company has control weakness that mainly includes the lack of separation of job duties and lack of warning signals. The job duties are overlapping as the same person is performing various jobs that are interrelated to each other. The job segregation is also an important area that shows great weakness. Such as Julie is Personal Assistant to the President however despite that work she is taking care of concession stores, sales, receivables, and supply of inventory. These are high-risk jobs as an opportunity for fraudulent activity is very high. The sales and receivables are a very risky task and should be managed by people separately. However, Julie manages both of them. The employees have personal relations with the executives such as Julie and the President, thus creating a high risk that one person would cover the misconduct of other. These are those where the control is weak.
The lack of segregation of duties is also a control weakness. People are performing multiple jobs. The president is engaged in managing the oversight of construction, receivables and fund raising. These three jobs should be performed by three different people rather than depending on the job. Interrelation of the jobs increases the chances of fraudulent activities.
Cash handling by one person is also a control weakness. The office manager is managing the receipts of all revenues collected by one person, thus giving the cash flows of the company in the hands of the single person that can commit fraudulent activities. There should be segregation where each person collects the receipt from parking revenue, ticket revenue, concession sales, and games programs. This will minimize any fraud commitment.
The purchase is not centrally carried in the company. Rather, any officer from any department can order for the purchase of the goods and can receive the delivered goods. The purchase related decision should be made centrally by the purchasing department. The order should be checked with the billed invoice to ensure that only the order items are delivered. This should also ensure that the genuine required items are only ordered. This will help to avoid the fraud committed by the supplier.
PERPETRATE FRAUD by BEAN COUNTERS’ PROCESSES
The current control systems of TBC can easily facilities the fraudulent activity on following grounds:
• The president can easily hide the fund being arranged for the construction of the training center by depicting the expenses at higher side. The forensic auditor should check this to control the risk factors in the company.
• The same could be done in the goods department where the manager can use the goods for its personal use by showing the increased construction cost. He can easily conceal the data from the TBC if he commits any frauds.
• The funds raised for training center can be easily hide by the President by overstating the construction cost of the training center. Hence, without giving any clue of fraud to the company.
• Two people are managing cash inflows only. They can easily commit fraud by mutual understanding. Hence, the company would never know that a fraud has been done, as their mutual understating would help them to hide it from others.
• The niece of the President controls inventory. Hence both of them can easily conceal the information by using the inventory for its personal use. In this way, they can easily conceal the information from the management.
• The person responsible for transferring cash in the office can steal cash collection from parking and programs. Hence, giving the cash flow management to one person would add problem and chances of frauds.
ADDITIONAL INFORMATION REQUIRED
Additional information will help the forensic auditors in finding any fraudulent activity. The data required would be account receivables data along with their aging schedule, accounts payable account to determine the purchases, the supplier's name, payables aging schedules and any abnormality in the length of time and payment trend. (Larry E. Rittenberg, 2009).
FOLLOWING ADDITIONAL INFORMATION CAN BE ASKED FROM THE INDIVIDUALS:
• The individuals can ask the details of bank account of President and the employees. (Singleton, 2010).
• Income sources of the President, and matching the same from the income given by TBC to ensure that they are same or any other source of income coming to him.
• The details of the contract for the construction of new training center.
• Individual receivables and creditors ledgers (Thomas W. Golden, 2011).
FOLLOWING ADDITIONAL INFORMATION CAN BE ASKED FROM THE OUTSIDE OF THE COMPANY:
• The banks of the company can be asked to provide the bank statement of TBC by the forensic auditors (Wells, 2010).
• The phone companies can be asked to provide the details of phone calls to President and the employees by the forensic auditors.
• The forensic auditors could ask the bank about the president’s bank account and other related accounts.
• contractor of the company can be asked to furnish the terms and conditions of the construction contract by the forensic auditors
• Independent valuation service provider can be asked to provide the estimated cost of the construction of new building by the forensic auditors
• The aged debtors who have not paid for a long time can be asked directly about the reason.
• Purchasing details for the direct confirmation can be done with the directors.
• Purchaser whose name is not on the authorized list of the creditors can be contacted for the confirmation (Esch, 2006).
Esch, R.C.a.S.V., 2006. Internal Auditing. Juta and Company Ltd.
George A. Manning, P.D., 2010. Financial Investigation and Forensic Accounting. New York: CRC Press.
Larry E. Rittenberg, K.J.A.A.G.a.B.S., 2009. Auditing: A Business Risk Approach. New York: Cengage Learning.
Singleton, T.W.S.a.A.J., 2010. Fraud Auditing and Forensic Accounting. New York: John Wiley and Sons.
Thomas W. Golden, S.L.S.M.M.C.a.J.S.P., 2011. A Guide to Forensic Accounting Investigation. New York: John Wiley and Sons.
Wells, M.-J.K.R.R.a.J.T., 2010. Forensic Accounting and Fraud Examination. New York: John Wiley and Sons.