Academy College Embezzlement Scheme Discussion
1) Consider the following story of an actual embezzlement:
This was the ingenious embezzler’s scheme: (a) He hired a print shop to print a private stock of Ajax Company checks in the company’s numerical sequence. (b) In his job as an accounts payable clerk at Ajax, he intercepted legitimate checks written by the accounts payable department and signed by the Ajax treasurer and destroyed them. (c) He substituted the same numbered check from the private stock, payable to himself in the same amount as the legitimate check, and he “signed” it with a rubber stamp that looked enough like the Ajax Company treasurer’s signature to fool the paying bank. (d) He deposited the money in his own bank account. The bank statement reconciler (a different person) was able to agree the check numbers and amounts listed in the cleared items in the bank statement to the recorded cash disbursement (check number and amount) and thus did not notice the embezzler’s scheme. The embezzler was able to process the vendor’s “past due” notice and the next month’s statement with complete documentation, enabling the Ajax treasurer to sign another check the next month paying both the past due balance and current charges. The embezzler was careful to scatter the double-expense payments among numerous accounts (telephone, office supplies, inventory, etc.) so the double-paid expenses did not distort any accounts very much. As time passed, the embezzler was able to recommend budget amounts that allowed a large enough budget so his double-paid expenses in various categories did not often pop up as large variances from the budget.
List and explain the ways and means you believe someone might detect the embezzlement. Think first about the ordinary everyday control activities. Then think about extensive detection efforts assuming a tip or indication of possible fraud has been received. Is this a “perfect crime”?
2) The case below tells the actual story of a cash embezzlement scheme. The case has two major parts: (1) problem and (2) audit approach. For the case, please consider how the auditor may have discovered the cash embezzlement scheme.
Albert owned and operated 40 coin laundries around town. As the business grew, he could no longer visit each one, empty the cash boxes, and deposit the receipts. Each location grossed about $140 to $160 per day, operating 365 days per year—gross receipts of about $2 million per year. Each of four part-time employees visited 10 locations, collecting the cash boxes and delivering them to Albert’s office where he would count the coins and currency (from the change machine) and prepare a bank deposit. One of the employees skimmed $5 to $10 from each location visited each day.
The daily theft does not seem like much, but at an average of $7.50 per day from each of 10 locations, totaled about $27,000 per year. If all four of the employees had stolen the same amount, the loss could have been over $100,000 per year.
Controls over the part-time employees were nonexistent. There was no overt or covert surprise observation and no times when two people went to collect cash (thereby needing to agree, in collusion, to steal). There was no rotation of locations or other indications to the employees that Albert was concerned about control. With no controls, there is no test of control activities. Obviously, however, “thinking like a crook” leads to the conclusion that the employees could simply pocket money.
Assuming that some employees are honest, periodically rotating the stores assigned to each employee and performing revenue comparisons (analytical procedures) on a store-by-store basis may be helpful. If revenues consistently decline for stores assigned to a specific employee, further investigation may be warranted.
Based on the audit approach discussed, how might an auditor devise a procedure to catch this fraudulent scheme.
3) You are the auditor for Konerko’s Office Supply Store, which is opening for business next week. The store owner has established all the controls you have recommended for ensuring that sales are recorded properly and cash is accounted for. The owner has heard from other small business owners that employees often used returned goods as means of skimming money from the register.
a. How might an employee use returned goods to skim money from the register?
b. What controls would you recommend to prevent or detect fraudulent returns?
c. What audit procedures might you perform to detect fraudulent returns?
4) Consider the following scenario:
Adam worked for the local hardware store as an outside sales representative. His job was to visit local companies and contractors in an attempt to identify their needs for tools and materials and provide a bid to supply those items. When a local contractor accepted a new job, Adam would get its material requirements, come back to the store, and prepare and submit a proposal for the items. After some initial success with Big Builder, a large contractor, the number of jobs awarded to Adam had decreased dramatically.
One day, Adam was back at the store after losing a bid to Big Builder when he noticed someone in the store purchasing the exact items and quantities that were in the specification for that bid. The combination of items was unusual, and it would be an unlikely coincidence for someone else to want such a combination in that exact quantity. The customer paid the retail price for the merchandise and left.
Adam decided to contact Big Builder, but he knew he could not do so and make any accusations. Adam set up a meeting with the president of Big Builder and inquired as to how Adam might “increase his business and better meet the needs of Big Builder.” Eventually, the recent bid entered the conversation. Adam showed his copy of the bid to the president. The president retrieved a copy of the purchase order and recognized that the amount on it was more than the bid Adam had submitted. The company that submitted the bid was K. A. Supplies Inc. Adam had never heard of K. A. Supplies and noted its address on the purchase order. The president of Big Builder promised to investigate the bidding process.
Adam drove to the address of K. A. Supplies and found a packaging and shipping store at that address. Furthermore, Adam went to the county courthouse and inquired about K. A. Supplies. The company was listed in the county records, and one of the purchasing agents for Big Builder was listed as an officer.
a. Given the information that Adam knows, what do you believe is occurring at Big Builder?
b. What other information would you want to obtain, and how might you retrieve that information?
c. What controls might be instituted at Big Builder to prevent improprieties in the bidding and purchasing process?