Deceit in Cash and Inventory Fraud - Unveiling Fraudulent Schemes

Cash and Inventory Fraud A Journey of Deceit Ron LaPlante, CMA, CFM, CPA, EA

Situation One Illuminated Family

Situation One Illuminated Family Two brothers own a lamp manufacturing factory than includes a kiln and many pounds of mud and clay. They share profit/loss equally One brother is a silent partner, not involved in the day-to-day operations, the other is involved in the operations. Son of active partner is operations manager 80 employees, the controller is also in charge of human resources and a three-person staff (accounts receivable/accounts payable/collections) $13 million organization Tax returns prepared by a Public Accountant (prior to 1961)

SITUATION ONE - QUESTION 1 THE PUBLIC ACCOUNTANT COULD HAVE ALLEVIATED THE SITUATION BY FIRST A. IGNORING THE INFORMATION PROVIDED BY THE CONTROLLER B. INQUIRING WITH THE MANAGING PARTNER OF THE ORGANIZATION C. CALLING THE INTERNAL REVENUE SERVICE REGARDING THE MATTER D. REVIEWING THE DETAILED BILLS SUBMITTED BY THE MANAGING PARTNER OF THE ORGANIZATION QUESTION 2 WHICH OF THE FOLLOWING ACCOUNTS WOULD NOT BE AFFECTED BY THIS FRAUD? A. DIVIDENDS B. ACCOUNTS RECEIVABLE C. GENERAL AND ADMINISTRATIVE EXPENSES D. CASH

Situation Two Hotel Kleptofornia

Situation Two Hotel Kleptofornia Family-owned business of hotels in county area Two brothers and one sister perform the management duties, accounting functions, contract negotiations, site manager oversight 250 employees, on-site manager, domestic engineers, custodians $30 million organization Preparing bank reconciliations for thirty hotel bank accounts, journal entry suggestions Wish to hire full-time person Also wish to hire night deposit collector for all the hotels

SITUATION 2 - QUESTION 1 WHICH OF THE FOLLOWING IS NOT A PROPER CASH CONTROL? A. SURPRISE CASH COUNTS B. NON-CASH HANDLERS RECONCILE BANK STATEMENTS C. PHYSICAL CASH DEPOSITS TO THE BANK ARE MADE BY THOSE NOT INVOLVED IN THE ACCOUNTING DEPARTMENT D. ONE PERSON CASH COUNTS QUESTION 2 PROPER PREVENTIVE CONTROLS IN THE HIRING PROCESS INCLUDES A. TESTING OF CORE QUALIFICATIONS B. LISTENING TO YOUR EMPLOYEES REGARDING PRIOR ENCOUNTERS WITH POTENTIAL EMPLOYEES C. BACKGROUND CHECK FOR PRIOR CRIMINAL ACTIVITY D. ALL OF THE ABOVE

Situation Three Fore Those In Need

Situation Three Fore Those In Need Large multi-national non-profit organization $11 billion Has a corps in large Western Texas city designed to service those in need (poor and indigent) Corps director ordained minister Rarely seen on the job Hired landscaper to oversee the grounds and perform bookkeeping Also hired paralegal regarding agreements to work with other non- profits, churches $1.5 million in donations to this corps

SITUATION 3 - QUESTION 1 THIS FRAUD INCLUDED ALL OF THE FOLLOWING EXCEPT A. DERELICTION OF DUTY B. PAYING INCOMPETENT PERSONNEL TO PERFORM SENSITIVE MATTERS C. USING CHARITABLE CONTRIBUTIONS FOR PERSONAL USE D. NEGLECTING TO PROVIDE FINANCIAL REPORTS TIMELY QUESTION 2 ALL OF THE FOLLOWING ACCOUNTS WERE OVERSTATED EXCEPT A. ENTERTAINMENT EXPENSES B. ACCOUNTS PAYABLE C. FURNITURE AND FIXTURES D. ADVERTISING EXPENSES

Situation Four Medical Equipment Matryoshka

Situation Four Medical Equipment Matryoshka Foreign headquartered company with a distribution center in the Western United States $50 million sales of medical resonance imaging devices Company has brand new CEO and COO. Why? Two-person accounting staff reporting to COO Hired to maintain status quo, but look for problems Report to COO Assess current staff

SITUATION FOUR - QUESTION 1 INVENTORY IS DECREASING, YET THERE ARE NO INCREASED SALES. WHICH OF THE FOLLOWING COULD BE OCCURRING? A. COST OF SALES IS NOT RECOGNIZED B. STOLEN INVENTORY C. COLLECTIONS OF ACCOUNTS RECEIVABLE ARE LAGGING D. FICTITIOUS SALES QUESTION 2 WHAT METHOD LISTED BELOW WOULD BE THE BEST WAY TO ALLEVIATE THE POTENTIAL FOR THIS TYPE OF FRAUD? A. MORE IN-DEPTH EXPLANATION MADE TO SUBSTANTIATE FINANCIAL STATEMENTS B. MORE FREQUENT EXAMINATION VISITS BY INTERNAL AUDITORS C. MANDATORY COMMUNICATION WITH BRANCH MANAGERS D. SURPRISE INVENTORY COUNTS

Situation Five Save Your Work Papers

Situation Five Save Your Work Papers $60 million pump company wishes to acquire two new pump companies in different U.S. regions to sell various sized pumps Hired to perform Sarbanes-Oxley (SOX) testing on acquiring company Also hired to perform a due-diligence review on the potential acquisitions Two potential acquisitions are $30 million and $12 million, respectively Offering for the smaller acquisition made known to that owner by acquiring company CEO Brought into this situation by placement firm Report to acquiring company CFO

SITUATION FIVE - QUESTION 1 THE SELLER OF THE BUSINESS DISPLAYED ALL OF THE FOLLOWING BEHAVIORS OF THE FRUAD DIAMOND EXCEPT: A. AUTHORITY B. OPPORTUNITY C. CAPABILITY D. RATIONALIZATION QUESTION 2 IF YOU ARE WORKING AS A TEMPORARY EMPLOYEE FOR A SEARCH FIRM WHICH IS THE BEST OF THE FOUR CHOICES BELOW TO PREVENT YOUR COURT APPEARANCE FROM BEING UNPLEASANT? A. KEEP ALL OF YOUR WORK PAPERS B. SUE THE ORGANIZATION WHERE YOU PERFORMED THE WORK C. REPORT THE INCIDENT TO THE STATE BOARD OF ACCOUNTANCY D. NOTIFY YOUR RECRUITER IMMEDIATELY

Situation Six Debt Be Not Proud

Situation Six Debt Be Not Proud Large multi-national non-profit organization $11 billion Has a division in Colorado that covers 40 corps from Montana to Utah (four states) Corps director ordained minister, hired person to run accounting department Division accountants do not see reports, bank reconciliations prepared by corps accountant Last report received from corps contained monthly activity shows peculiar general ledger entries Tasked to find out what is going on

SITUATION SIX - QUESTION 1 THIS FRAUDULENT SCHEME CAN BEST BE SUMMARIZED AS A(N): A. FALSE VENDOR CREATION B. STOLEN CHECK INSTANCES C. CHECK DEFALCATION SCHEME D. GHOST EMPLOYEE SCHEME QUESTION 2 WHICH OF THE FOLLOWING WOULD BE THE BEST WAY TO PREVENT THIS FRAUD FROM HAPPENING IN THE FUTURE? A. MANDATORY TIME OFF (VACATIONS, OTHER PAID TIME OFF) B. INDEPENDENT PERSON HAS ACCESS TO VIEW BANK ACTIVITY C. EXAMINE CHECK ENDORSEMENTS D. ALL OF THE ABOVE

Situation Seven Darkened Camp

Situation Seven- Darkened Camp Large multi-national non-profit organization $11 billion Divisions host and manage children s day and seasonal outdoor camps Division hired accountant to perform bookkeeping of division camps Tasked to determine status of camp funds Last report received matched the same numbers as those of a previous month

SITUATION SEVEN - QUESTION 1 WAYS OF PROTECTING FUNDS TO BE USED FOR THE ORIGINAL PURPOSE THEY WERE DESIGNED FOR INCLUDE ALL OF THE FOLLOWING EXCEPT A. DESIGNATED ACCOUNTS B. RESTRICTED ACCESS C. AUTHORIZED CHARTER TO ESTABLISH FUNDS D. MORE THAN ONE PERSON INVOLVED IN ACCOUNTING FOR TRANSACTIONS QUESTION 2 WITHOUT ADEQUATE OVERSIGHT TO THE TRANSACTIONS PREPARED FOR A DESIGNATED FUND, WHAT IS THE BEST SAFEGUARD AGAINST THEFT? A. CASH TRANSACTIONS B. TWO PERSON ELECTRONIC AUTHORIZATION FOR DISBURSEMENTS FROM THE FUND C. DEPOSIT VERIFICATION D. BANK RECONCILIATION BY THOSE NOT INVOLVED IN RECORDING TRANSACTIONS