Return of the Tallahassee BeanCounters: A Case in Forensic

Transcription

ISSUES IN ACCOUNTING EDUCATION - TEACHING NOTES
Vol. 25, No. 2
2010
pp. 1–40
American Accounting Association
TEACHING NOTES
Return of the Tallahassee BeanCounters:
A Case in Forensic Accounting
Carol Callaway Dee and Cindy Durtschi
Keywords: fraud detection; forensic accounting; auditing; problem-based learning.
Data Availability: The authors are willing to share any data as well as Excel versions
of all student and teacher handouts. 共Please contact Professor
Durtschi.兲
PART III: TEACHING NOTES INTRODUCTION
he Return of the Tallahassee BeanCounters 共TBC II兲 uses the same basic setting as in the
original Tallahassee BeanCounters 共TBC I兲 case; however, the frauds, perpetrators, opportunities, and motivations are very different. This allows instructors to rotate versions of the
case to avoid information transfer from one semester to the next. The two cases are independent;
knowledge of TBC I is not necessary to use this case. The differences between the two cases are
outlined in Appendix A. When using TBC II, instructors should assume that TBC has not been a
victim of fraud previously—that is, assume that the events of TBC I have not occurred.
Statement on Auditing Standards 共SAS兲 No. 99 共as amended by SAS No. 113兲共AICPA 2002兲
discusses three broad categories of fraud: asset misappropriation, financial statement fraud, and
corruption. TBC II includes frauds of all three types: improper revenue recognition 共financial
statement fraud兲, bid rigging in a construction project 共corruption兲, stolen concession inventory
共asset misappropriation兲, and payments made to a related party for substandard maintenance work
共corruption兲. In particular, the revenue recognition fraud in TBC II should be useful to instructors
of auditing courses, given that 共1兲 auditors are required to assume “improper revenue recognition”
as a fraud risk area 共SAS No. 99, ¶ 41, 54兲, and 共2兲 a high proportion of financial statement frauds
involve improper revenue recognition 共Beasley et al. 1999兲.
This case involves collusion between two employees—the company president, Phil Ackers,
and his assistant Julie Roper 共who is also his niece兲. Additionally, TBC has an incentive bonus
T
Carol Callaway Dee is an Associate Professor at the University of Colorado Denver and Cindy Durtschi is
an Associate Professor at DePaul University.
We thank Special Agent Joseph Cornwell, FBI 共now retired兲, and Anthony Carro, former Chief Investigator of the
Manhattan District Attorney’s office, for their input and review of the case. We also thank Robert Dosch 共University of
North Dakota兲, Thomas Buckhoff 共Georgia Southern University兲, William Hillison 共Florida State University兲, Kevan L.
Jensen 共University of Oklahoma兲, Patricia Johnson 共Canisius College兲, Chih-Chen Lee 共Northern Illinois University兲,
David O’Brien 共Pittsburg State University兲, and Susan Swanger 共Western Carolina University兲 for helpful comments and
assistance in implementing early versions of this case. We also thank participants at the 2007 and 2009 Fraud and Forensic
Accounting Education Conferences held in Savannah and Atlanta, Georgia.
Published Online: May 2010
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Dee and Durtschi
plan in place that motivates Phil to manipulate the financial records in order to maximize his
bonus. This provides students with an opportunity to discover the agency problems that can be
related to the structure of executive compensation plans.
As in TBC I, this case provides students with experience in detecting fraud in a company’s
financial records. Initially, students are not provided with enough information to solve the case.
They must use the Student Handouts 共SH兲 as a starting point for their investigation and then send
email requests to their instructor for additional data needed to further their investigation. The
instructor is responsible for answering the students’ inquiries and providing the additional data
requested. This additional data is contained in the Teacher Handouts 共TH兲.1
This section provides the solutions to the case, as well as examples of audit trails followed by
students in solving the frauds.2 The frauds described below are the only ones in the case; however,
as in most accounting records, students may find other fluctuations, errors, or unusual items that
are unrelated to fraud. Our experience is that when students themselves make an error, or have a
misunderstanding of the data, they can be quite insistent that it is a fraud. When students believe
they have found a fraud in some area other than those indicated in these solutions—accounts
receivable, concessions, construction, and maintenance—you can respond to the students 共roleplaying as the appropriate TBC employee兲 that the account they are questioning is correct.
GENERAL INFORMATION
There are many accounts that do not include fraud. However, to discover this, students have
to ask for verification of the numbers they have been provided by TBC contained in the Student
Handouts. This verification can be supplied by the instructor with the following handouts:
TH 1:
TH 2:
TH 3:
TH 4:
TH 5:
TH 14:
TH 16:
Appendix B:
Invoices provided by Sysco Inc., the concession supplier
Invoices provided by Sports Chalet for equipment purchased by TBC
Amounts billed by ADP Payroll Services for salaries
Physical inventories of sports equipment
Physical inventories of parking and programs
Sales tax computations
Financial statement reconciliation
Background information
TH 1, TH 2, and TH 3 can be provided to students who ask Sysco, Sports Chalet or ADP,
respectively, for confirmation of purchase orders, invoices and amounts paid by TBC. TH 4 and
TH 5 are physical inventory counts for the sports equipment, parking, and programs. There are no
frauds in these accounts. TH 16 is provided to assist instructors in tracking transactions from the
General Journal 共SH 4兲 to the financial statements 共SH 17兲. These may be given to student teams
who ask for help reconciling to the financial statements, at the instructor’s discretion.
Financial Pressure
The biographies in Appendix B show that Phil Ackers, the company president, was a major
league ballplayer in his younger years. At that time, while he was making a high salary, several of
his wife’s siblings began to rely on him to take care of them financially. Giving financial assistance
was not a problem then, but when his playing days ended, Phil no longer had the financial
resources to support them. Phil Ackers and his wife Madelyn Harris Ackers have two children of
1
2
All handouts are available in electronic form 共Excel spreadsheets兲 from Professor Durtschi.
We recommend removing the Teacher Handout number at the top of each handout prior to releasing them to the
students. This will ensure that students are focusing on whether they have enough information to prove their case rather
than whether they have acquired all the handouts.
Issues in Accounting Education - Teaching Notes
Volume 25, No. 2, 2010
Return of the Tallahassee BeanCounters
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their own, and while they were able to wean several of Madelyn’s siblings from their financial
support, there were two who never got off the dole: Freddy Harris, Madelyn’s younger brother,
and Jerry Roper, Madelyn’s brother-in-law 共married to her sister Sarah Harris Roper兲.
Opportunity
Franklin Kennedy 共the owner兲 lives in Boston and also owns the Boston Sox. Because he
considers TBC a farm team for the Sox, there is a close relationship between the two teams. He
personally likes and trusts Phil, so is very “hands off” in his management style. Franklin rarely
comes to Florida; instead, Phil flies to Boston when needed. When Phil’s long-time assistant Terri
Hughes leaves TBC to care for her ailing mother, Phil hires his niece, Julie Roper, who is the
daughter of his wife’s sister 共Sarah Harris Roper兲. Now Phil has both the opportunity to override
controls and a willing assistant to perpetrate his schemes.
Rationalization
Phil has been a good guy his entire life. He has supported his wife’s indolent relatives for
years, and now that his kids are in college, he has large expenses and a salary that is much smaller
than that to which he is accustomed. He works hard for TBC. He is on the road a lot, traveling
economy class and feels he deserves the extra compensation—especially after Franklin gave him
the added responsibility of overseeing the construction of a new training facility without raising
his pay.
FRAUD SOLUTIONS AND ASSISTANCE IN ANSWERING STUDENT INQUIRIES
Revenue Recognition Fraud
Who committed the fraud: Phil Ackers, with the assistance of Julie Roper.
How the fraud was committed: Julie Roper 共Phil’s assistant兲 is in charge of the group ticket
sales and collections of related accounts receivable. All group sales are on account, paid subsequent to the games. The fraud is conceived by Phil when the company begins construction of a
new training facility. Phil 共and, coincidently, Ben兲 receives a bonus based on the profit margin the
company can achieve during the construction phase of the training facility. 共See TH 9 for details
of the bonus structure and Appendix C for the gross profit calculation.兲 The bonus arises because
the interest rate on the 30-year mortgage loan for the facility was based on a sliding scale
determined by TBC’s performance. When Phil sees that the team cannot meet the required profit
percentage, he and Julie add non-existent groups to her “will-call” list prior to each game. All
will-call tickets are on account and billed after the game. Phil records all accounts receivable
共legitimate and not兲 as revenue and includes both real and false ticket sales in the accounts
receivable ledger. Legitimate accounts receivable are collected by Julie in the weeks following the
games. The false accounts receivable are, of course, not collected; thus, over time the accounts
receivable balance continues to grow. Because only Phil and Julie maintain the accounts receivable, and the owner 共Franklin Kennedy兲 does not review the financial statements, the uncollected
共fraudulent兲 accounts receivable go undiscovered.
Evidence of intent: This is not a onetime error, but a consistent pattern of false ticket sales that
escalates over time. In addition, the false revenue enables Phil to receive a large bonus from TBC.
Julie is a willing accomplice because Phil offers to share his bonus with her if they can ensure he
receives it by showing the needed profit percentage.
Economic impact: The direct economic impact totals $110,448 from false revenue recorded.
Table 1 presents the solution to the revenue fraud including details of the fraudulent accounts
receivable and the dates they were entered into the TBC books.
In addition, this false revenue leads TBC to pay out a combined total of $52,056 in bonuses
to Phil and Ben for which they were not eligible. The overall economic impact is more difficult to
Volume 25, No. 2, 2010
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Dee and Durtschi
TABLE 1
Solution to Revenue Recognition Fraud
Date
Entered
Amt.
Gaines Street Church Boy
Scouts
Bradfordville Kiwanis
Thomasville Masons
Boy Scouts Troops 243 & 255
Meridian Valley Church
Girl Scout Troop 199
Girl Scout Troops 413 & 414
1/13
$1,200
Boy Scout Troop 442
2/26
$1,500
1/13
1/13
1/14
1/14
1/14
1/15
$600
$600
$1,200
$1,200
$600
$1,200
2/26
2/26
2/26
2/26
2/26
2/26
$1,200
$1,200
$2,400
$2,400
$2,400
$2,400
Girl Scout Troop 19
Cub Scout Troop 24
Leon County Junior League
Wakulla County Junior League
Apalachicola Brownie Troops
Cub Scout Troop 294
Girl Scout Troop 13
Crawfordville Little League
Crawfordville Harriers
Girl Scout Troops 21 & 24
Governor’s Square Association
Call Street Little League
Apalachee Pky Christian
Church
Godby High School Baseball
Team
June Street Senior Center
Boy Scout Troop 324
Mill City Square Dance Club
Meyer’s Park Horseman’s Club
Wilson Senior Center
Leon County Masons
Bellevue Middle School
Milltown Regatta Club
Wakulla Sewing Circle
Elizabeth Cobb Middle School
Elizabeth Cobb Middle School
1/15
1/15
1/15
1/15
2/5
2/5
2/5
2/5
2/5
2/6
2/6
2/6
2/6
2/6
$540
$600
$600
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$2,400
Killearn First Church
Leon County Firefighters
Girl Scout Troop 53
Crawfordville Little League
Wakulla Springs Junior
League
Mill Creek Senior Center
Godby High School Baseball
Bilby Revival Church
Jordan River Senior Center
Cub Scout Troop 32
Buck Lake Elementary
Leon County Democrats
Centerville Sewing Circle
Jefferson County Singles
Jefferson County Singers
3/10
3/10
3/10
3/10
3/10
3/11
3/11
3/11
3/11
4/7
4/7
4/7
4/7
4/7
$600
$600
$600
$600
$1,200
$1,200
$1,200
$1,200
$1,200
$2,400
$2,400
$2,400
$2,400
$2,400
2/7
$1,200
Lake Iamonia Rowing Club
4/8
$1,200
2/7
2/7
2/7
2/7
2/24
2/24
2/24
2/24
2/24
2/25
2/25
$1,200
$1,200
$1,200
$2,400
$1,200
$1,200
$1,200
$1,200
$2,400
$1,200
$1,200
4/8
4/8
4/8
4/8
4/8
4/8
4/8
4/22
4/22
4/22
4/22
$1,200
$1,200
$1,200
$1,200
$1,200
$1,200
$3,600
$2,208
$2,400
$2,400
$2,400
Elbert Elementary
Thomasville Boy Scouts
Crawfordville Kiwanis
Thomasville Junior Masons
2/25
2/25
2/25
2/25
$1,200
$1,200
$1,200
$2,400
Thomasville Baptist Church
Wakulla AME Church
Panama City VFW
Shell Point Quilters
Wakulla County Running Club
Leon Rowers Booster Club
Jefferson County Singers
Gamble Street Quilters
Macomb Valley Car Club
Pensacola Church
Wakulla County Women’s
Guild
FAMU Boosters
FAMU Marching Band
FAMU Student Council
4/22
4/22
4/22
$2,400
$2,400
$4,800
Fraudulent A/R
Total Fraud Amount
Date
Entered
Fraudulent A/R
Amt.
$110,448
Volume 25, No. 2, 2010
5
determine. Should the bank discover the fraud, they may escalate payment of the mortgage, and/or
require payment of additional interest and penalties. Further, from an ethical standpoint, the bank’s
other customers suffered to the extent they paid interest rates higher than that paid by TBC.
Evidence Phil and Julie received and used the money from the fraud: Phil qualifies for the
largest bonus. In addition, he withdraws $10,000 in cash from his personal bank account and gives
it to Julie. She deposits it in her checking account.
Handouts Associated with Revenue Recognition Fraud
TH 6:
TH 7:
TH 8:
TH 9:
SH 4:
SH 6:
SH 17:
Appendix C:
Bank records other than TBC
Game attendance 共from tickets collected at gates兲, and arena rental calculation
Accounts receivable
Phil and Ben’s bonus schedule
General journal
Recurring expenses and revenues
Monthly financial statements
Calculation of gross profit percentage for bonuses paid to Phil and Ben
Evidence trail students typically follow and suggested responses: Students should notice from
inspection of the financial statements 共SH 17兲 that accounts receivable grow over time at a
suspicious rate. They should request accounts receivable records 共TH 8兲 and reconcile them to the
financial statement balance. The amounts will reconcile 共because the false accounts receivable
have not been written off兲, but students should notice from TH 8 that many accounts are overdue.
If they question Julie about the late accounts, Julie will say that Mr. Ackers does not like to trouble
not-for-profit organizations with collection calls. Students should not be satisfied with that answer.
If students send confirmation letters to the fraudulent accounts, the instructor can reply on behalf
of those groups that the group never attended a TBC game, nor made plans to do so. 共Groups
added by Phil and Julie and their supposed dates of attendance are shown in Table 1.兲
Additionally, students may notice from SH 6 that TBC pays rent on the arena at 5 percent of
ticket sales based on attendance. If students ask Michelle how she calculates payment, respond
with TH 7. Students will see that the attendance does not reconcile to the recorded revenue.
In the student introductory materials, Myrna brings up how tense things were around the
office while cutting expenses and raising revenues in order to qualify for the loan. She mentions
that Ben and Phil were thrilled about the bonuses. This should make the students curious about the
bonus structure. When they ask for the bonus structure, respond with TH 9. Initially students may
suspect Ben. However, he merely benefited from Phil’s malfeasance—not because Phil wanted
him to, but because that is the way Frank Kennedy designed the bonus structure. Despite the fact
that Ben has financial difficulties, he cannot be the person perpetrating the fraud because he 共1兲
has no authorization over accounts receivable, 共2兲 does not sign the maintenance reports, and 共3兲
is not involved with concessions or construction of the training facility. Appendix C shows the
computation of the gross profit percentage and shows how the false revenue enabled Phil to
qualify for the highest bonus—and how no bonus would have been received without the false
sales.3
Shoddy Maintenance Fraud
Who committed the fraud: Phil Ackers and Julie Roper.
How the fraud was committed: Freddy Harris is brother-in-law to Phil Ackers—i.e., brother to
3
To achieve the revenue goals, Phil also delays paying for some equipment and concession invoices and also delays
paying one of the visiting teams their share of the game revenue.
Volume 25, No. 2, 2010
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Dee and Durtschi
Phil’s wife. Freddy runs a repair shop out of an old barn near his home. He repairs lawnmowers
and other small machines, but cannot seem to make much of a living at it. When Phil was a
ballplayer, he sent Freddy a monthly check, mostly to keep Freddy in Florida rather than moving
in with him. When Phil retired from playing ball, he opened a restaurant near Miami and was able
to continue sending Freddy the checks. However, when the restaurant burned to the ground, Phil’s
wife began agitating to return to her hometown of Tallahassee. That is when Phil took the job as
president of TBC.
While Phil loves his job, it is not as lucrative as his former jobs and Phil can no longer afford
to pay Freddy out of his own pocket. He decides it is time to help Freddy stand on his own two
feet, so he begins to assign to Freddy any small jobs and repairs that arise around TBC’s facilities.
Freddy is a huge baseball fan and overjoyed by this arrangement. Unfortunately, Freddy is not
much of a repairman. He arrives 共usually late兲 on days he has an assignment and tinkers at the job
for awhile. Then he takes his lawn chair down to the practice field, where eats his sandwich, drinks
his soda and falls asleep in the afternoon to the crack of baseball bats. Despite the fact that his
performance is very poor, either Phil or Julie signs off on each job 共SH 14兲. Julie pays him
promptly with Phil’s signature on the checks.
Evidence of intent: Phil’s intent can be shown by the fact that there is a steady stream of jobs
going Freddy’s way that either Phil or Julie “sign off” as completed and satisfactory, when they are
clearly unsatisfactory.
Economic impact: Table 2 shows that the total difference between the amounts paid by TBC
for each maintenance order and the value of the services received was $46,160.
Evidence Phil or Julie benefited from the fraud: There is no evidence that either Phil or Julie
personally received any money from the fraud. However, Phil still benefited because he no longer
had to pay Freddy directly for his support; rather, he used TBC to support his less-than-ambitious
brother-in-law. Phil previously paid Freddy $1,000 per month from his own pocket.
TABLE 2
Solution to Shoddy Maintenance Fraud
PO Date
May 3
May 15
Jun 10
Jun 14
Jun 20
Jul 3
Jul 14
Aug 5
Aug 17
Sep 2
Sep 6
Sep 13
Sep 30
Total Fraud
Paid
Opinion of Value
of Work Done
$700
$1,500
$2,000
$33,500
$250
$1,000
$1,200
$250
$1,950
$250
$10,000
$2,000
$8,000
$250
$0
$500
$12,000
$40
$200
$600
$50
$500
$50
$2,000
$250
$0
Difference between
What Was Paid and
Value of Work Done
$450
$1,500
$1,500
$21,500
$210
$800
$600
$200
$1,450
$200
$8,000
$1,750
$8,000
$46,160
Volume 25, No. 2, 2010
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Handouts Associated with Maintenance Fraud
SH 6:
SH 14:
TH 6:
TH 10:
Appendix B:
Recurring expenses and revenues
Maintenance purchase orders and invoices
Bank records other than TBC 共for Freddy’s Fix-it兲
Independent appraisal of Freddy’s work
Background information 共on Phil, Julie and Freddy兲
Evidence trail students typically follow and suggested responses: Students should note that
TBC has a permanent contract with AIA Handymen for routine maintenance 共SH 6兲. Students
should wonder why Freddy’s Fix-it is being used so frequently since TBC has a standing contract
with AIA, and notice the relatively high price paid for the maintenance jobs performed.
Students have the purchase orders created by Julie Roper as well as the invoices provided by
Freddy’s Fix-it 共SH 14兲. They can see that it was either Julie or Phil who signed off on the jobs as
completed. However, if students ask anyone else in TBC about the quality of Freddy’s work, they
should receive complaints. While none of the other TBC employees will know the amount paid for
each job, all will be eager to report, if asked, that the work was done poorly. They will also report
that Freddy works short hours and spends a lot of time in his lawn chair watching the players
practice.
Students have no way of knowing without investigation that Freddy is the brother-in-law of
Phil Ackers, or the uncle of Julie Roper. However, SH 14 共invoices from Freddy’s Fix-it兲 show the
proprietor is Freddy Harris. Therefore, at some point students should start making connections if,
in answering inquiries, the instructor drops the fact that Phil’s wife’s name is Madelyn Harris
Ackers. Students might also discover the connection if they suspect Freddy’s Fix-it is a “shell”
operation and ask to drive out to Bainbridge to determine if the shop actually exists. In that case
the instructor can respond that Freddy was sitting outside at his shop 共in a lawn chair, of course兲
and waved them in. The instructor’s response can include the information that a picture of Freddy
and Phil is hanging on the wall. Alternatively, if students address inquiries to Freddy, he himself
can mention that Phil is his brother-in-law. The family relationship should induce the students to
have an outside inspector come and examine Freddy’s work to determine if it was completed to a
satisfactory level and provide an estimate of what should have been charged for completion of
similar work. TH 10 provides that independent, outside appraisal of Freddy’s work.
Concession Theft Fraud
Who committed the fraud: Julie Roper with the knowledge of Phil Ackers.
How the fraud was committed: Julie Roper, Phil Ackers’ niece, was recently hired to take the
place of Terri Hughes, Phil’s long-time secretary, who left TBC when her elderly mother fell ill.
Julie is a part-time student at Tallahassee Community College majoring in business while working
part-time at TBC. She is responsible for writing checks, collecting accounts receivable, and ordering and maintaining the concession inventory. During games, she works in the storage room
under the bleachers where she hands out the supplies to runners from up in the stands. The job
previously belonged to Holly Hope, the concession supervisor. While Holly is relieved to no
longer have the job, she nevertheless maintains an interest in the proper accounting of inventory
out of a strong sense of duty. She even has kept a running inventory of concessions 共as of the
morning after each game兲 as mentioned in SH 2.
Phil tells Julie that she can take the concession “leftovers” to her parent’s Stop N’ Shop store,
where they can then resell the goods and earn pure profit 共as there is no associated cost兲. Phil
suggests the plan to Julie as a way to help her parents, who are struggling to make ends meet with
the earnings from their small convenience store. Julie agrees because she knows her parents need
the help and she rationalizes it as food that would probably go to waste anyway. Additionally, her
uncle, the president of the company, said it was okay to do so.
Volume 25, No. 2, 2010
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Dee and Durtschi
To commit the fraud, Julie drives her parents’ pickup truck to the storeroom after each game
and takes a large portion of the remaining concessions to her parent’s Stop N’ Shop store where
they are sold. She then reorders more concessions for TBC than would otherwise be needed.
Evidence of intent: This is done repeatedly throughout the five-month period for which the
students have records.
Economic impact: Table 3 shows the solution for the concession theft fraud. A total of
$14,678 worth of inventory was stolen over the five months included in this case.
Evidence Julie or Phil received and used money from the fraud: While neither Julie nor Phil
receives money directly from the fraud, Julie receives a paycheck from her parents’ Stop N’ Shop.
Her parents receive money by selling the stolen goods. The cost to TBC is $14,678; however,
those same items are sold at the Stop N’ Shop for $38,800. TH 6 shows that in addition to this
help, Phil writes a check to Julie’s father 共Bud Roper兲 for $1,000 each month.
Phil has been helping the family for years. Before the concession arrangement, he used to
send a monthly check for $2,000 to Julie’s parents; Julie or her parents can admit to this if asked.
Phil also pays Julie’s tuition each semester at Tallahassee Community College. Thus, once again,
Phil has taken the burden for supporting his wife’s relatives off of his own shoulders and onto the
books of TBC.
Handouts Associated with Concession Theft Fraud
SH 2:
SH 13:
TH 6:
TH 11:
TH 15:
Appendix B:
Observations of financial functions
Concessions
Bank records other than TBC 共Julie’s checking account兲
Stop N’ Shop sales records
Holly’s count of the concessions after each game
Background information 共on Julie兲
Evidence trail students typically follow and suggested responses: Students have in their handouts the purchase orders and physical inventory for concessions, as well as the quantity of concessions sold at each game 共SH 13兲. They should note that the physical inventory does not
reconcile easily to the perpetual inventory, as write-offs of inventory happen only once a month—
when Julie does her count and writes off the inventory she has taken to her parents’ convenience
store. By looking at the General Journal, students can see that the spoilage account is very high,
and that some items assigned to spoilage do not normally spoil 共such as condiments and soda pop兲.
This should compel them to investigate further.
During their observations of the concession process 共SH 2兲, students should note that Holly
takes a deep interest in what happens with concessions and mentions that she takes an inventory
count for her own peace of mind. If they ask Holly for more information, respond with TH 15
共Holly’s count of the concessions the morning after each game兲.
At this point, students usually ask to observe the storage room after the game. If they do, the
instructor can respond that they observe Julie arriving in a pickup truck and loading boxes in the
bed of the truck. If they follow the truck, they will see Julie unloading the boxes into the back door
of a Stop N’ Shop on the far side of town. They will also observe Julie letting herself into the
trailer next door, then later driving away after waving good-bye to her mother standing on the
stoop. If they go into the Stop N’ Shop, they will encounter Julie’s mother working behind the
counter. She will confirm that Julie is her daughter and works there on weekends.
At this point, students often believe they have solved the case. However, students need to
prove that the boxes taken from the storage room contained TBC concessions, and were not filled
with something else. For example, Julie could contend that the boxes taken contained not concessions, but school books that she was storing at TBC until she could take them home. Further,
Volume 25, No. 2, 2010
Hamburgers
Hotdogs
Sodas
Condiments
Beer
Date
No.
Purch.
No.
Sold
No.
Purch.
No.
Sold
No.
Purch.
No.
Sold
No.
Purch.
No.
Sold
No.
Purch.
No.
Sold
May
Jun
Jul
Aug
Sep
1344
1098
1256
1098
456
1744
1898
1556
1498
1856
350
400
500
500
100
950
1200
800
800
1300
1500
1500
1500
1500
1500
2100
2300
2000
2000
3700
3000
4000
5000
5000
2000
5000
6000
6000
6000
8000
2500
2500
2500
2500
1500
2900
3200
2700
2700
2850
Difference 共i.e., stolen兲
May
Jun
Jul
Aug
Sep
400
800
300
400
1400
600
800
300
300
1200
600
800
500
500
2200
2000
2000
1000
1000
6000
400
700
200
200
1350
Total No.
3300
3200
4600
12000
2850
Sold for
Profit for Stop N’ Shop
$4.00
$13,200
$3.00
$9,600
$1.00
$4,600
$0.00
$0
Cost to TBC
Loss for TBC
Total Loss
$4.00
$11,400
$38,800
$1.40
$4,620
$1.25
$4,000
$0.35
$1,610
$0.05
$600
$1.35
$3,848
$14,678
9
Volume 25, No. 2, 2010
Total Profit
TABLE 3
Solution for Concession Theft Fraud
10
Dee and Durtschi
students must also show the concessions taken were actually sold at the Stop N’ Shop. To do this,
students can observe that the Stop N’ Shop uses the same brands as TBC, to which Julie could
reply that she orders the same items for both businesses. In the past, students have been quite
clever at figuring out what was in the boxes, including secretly marking items at TBC and tracing
them to the Stop N’ Shop.
The best way to solve the fraud is to obtain the records of the Stop N’ Shop store and compare
the number of items purchased to the number of items sold 共TH 11兲. Obviously, in a true forensic
investigation it could be difficult to obtain this information. However, we allow students who have
enough evidence—i.e., have seen Julie take boxes from TBC and deliver them to the Stop N’
Shop—to “subpoena” these records.
Construction Bid Rigging Fraud
Who committed the fraud: Phil Ackers.
How the fraud was committed: Phil Ackers was assigned by Franklin Kennedy to oversee the
building of a new training facility. One of Phil’s old friends 共Gerry Newbold兲, who now works for
Larkin Construction, approached him with a bid rigging scheme that could net him over $60,000.
The scheme goes as follows. As is normal practice for this type of contract, Phil puts the blueprints
and specifications out for competitive bid. The bids arrive in sealed envelopes, and are 共supposedly兲 locked in Phil’s office safe until the day they are opened in the presence of the contractors
and the job awarded.
Unbeknownst to anyone, Phil secretly opens the bids and passes the information on to his
friend, Gerald Newbold at Larkin Construction. Larkin submits their bid at the last moment.
Larkin Construction gives Phil $10,000 cash on the day the contract is awarded. He deposits the
money in his wife’s account. Larkin achieves their low bid by underbidding or low-balling on
some items while overbidding 共over charging兲 on others. The agreement between Phil and Gerald
was that after the contract was awarded, Phil would submit bogus construction change orders,
allowing Larkin to make up for the underbid items contained in their original proposal. The end
result is that TBC overpays for all aspects of the contract. Larkin Construction colludes with
several of the subcontractors to enact this scheme. In the end, Larkin pays Phil half of the
overcharges.
Evidence of intent: Phil opens the bids ahead of time.
Economic impact: Larkin underbid on several items as shown in Table 4. With the exception
of toilet accessories, amounts for all items that were underbid by Larkin in the original bidding
were later recouped through change orders. As a result, the total cost after change orders rose to
$820,781—an increase of $105,787 over the original Larkin bid of $714,994. The arrangement
with Phil was for him to receive one-half of the difference 共$52,893.50兲 as a kickback.
Evidence Phil received and used the money from the fraud: TH 6 shows two cash deposits in
a bank account in the name of Madelyn Harris Ackers 共Phil’s wife兲. The first deposit for $10,000
was made the day after the contract was awarded to Larkin. Larkin’s accounts show a cash
withdrawal for $10,000 on the same day. The second cash deposit into Madelyn Ackers’ account
is on September 30th for $52.893.50—half the overcharged amount. Again, Larkin has a corresponding cash withdrawal on the same date.
Handouts Associated with Construction Bid Rigging Fraud
SH 12:
TH 12:
TH 13:
Construction invoices received by TBC
Completed bids and change orders
Independent construction appraiser’s assessment of change orders
Evidence trail students typically follow and suggested responses: SH 12 shows the construction invoices received and paid by TBC. Students should note that there are change orders in July,
Volume 25, No. 2, 2010
Amount over Scheduled Value: $105,787
Specs
Larkin
Bid
Amt
Larkin
Overbid
167,996.61
6,269.50
177,404.70
16,000.00
9,408.09
9,730.50
41,876.91
4,515.00
45,307.02
25,900.00
141,856.00
25,000.00
8,734.75
39,994.00
4,600.00
54,487.00
25,000.00
152,147.00
18,000.00
8,319.00
37,250.00
47,326.21
25,000.00
28,500.00
12,090.21
8,685.00
8,645.65
6,400.00
10,000.00
7,270.00
3,722.22
884.43
14,076.55
63,122.50
59,558.75
5,168.00
727,985.32
3,584.00
645.00
13,237.00
58,407.00
62,000.00
4,000.00
714,994.70
Amt
Larkin
Underbid
Chg #3
Chg #2
5,586.00
1,134.00
6,720.00
0.00
⫺1,882.91
1,184.00
2,000.00
⫺900.00
1,484.00
⫺7,000.00
⫺415.75
4,410.00
568.00
9,270.00
3,184.00
0.00
0.00
1,484.00
0.00
13,680.00
2,022.00
⫺12,250.00
⫺18,826.21
11,323.00
30,052.00
2,000.00
85.00
9,179.98
10,291.00
1,454.00
⫺5,690.21
13,323.00
30,052.00
19,042.00
1,315.00
⫺1,375.65
2,000.00
⫺138.22
⫺239.43
⫺839.55
⫺4,715.50
4,237.00
1,000.00
2,000.00
3,100.00
⫺1,168.00
⫺55,441.44
61,844.00
16,404.00
3,543.00
27,539.00
400.00
2,441.25
42,450.81
Total Chg
Orders
Chg #1
19,042.00
0.00
2,000.00
0.00
400.00
4,237.00
6,100.00
0.00
3,543.00
105,787.00
11
Volume 25, No. 2, 2010
General Conditions
Demolition of existing
structure
Site work
Landscape, sod
Concrete
Masonry 共Brick 210/thousand兲
Structural steel, metal rails
Carpentry
Thermal, moisture protection,
insulation
Doors, windows, hardware
Stucco, drywall, acoustic
ceiling
Floor covering
Painting
Specialties, statues, award
cases
Toilet, accessories, partitions
Sign reconstruction
Plumbing, water, sewer, gutters
Heating, a/c
Electrical
Sound system
Average of
Other Bids
TABLE 4
Solution to Bid Rigging Fraud
12
Dee and Durtschi
August, and September, as well as many cost overruns. This should cause them to request all the
original bids. The instructor responds to this request with TH 12 which shows not only the original
bids, but also the dates the bids arrived. The fact that the Larkin bid was the last to arrive, and that
it arrived the night prior to the bids being opened should be a red flag.
A close comparison of the change orders to the bids should show students that the change
orders are in the areas in which Larkin underbid the other competitors. This should be a very large
red flag. At this point students usually make inquiries to Phil as to why there are change orders.
Phil gives excuses such as Larkin had already won the contract when he 共Phil兲 decided the
changes were necessary. In particular, Phil decided to “upgrade” certain specifications. To solve
the fraud, students must determine that the changes were phony. To do this they need to ask an
appraiser to observe the improvements and determine whether the changes improved upon the
original specifications. TH 13 is the result of the independent appraiser’s report and says that the
specifications on the change orders were not substantially different than the original materials
specified.
Students should also examine the bidding process to determine how Larkin won the contract.
They will be unable to prove that the bids were opened early, unless they can trap either Phil or
Gerald Newbold 共at Larkin兲 into confessing to the scheme at the end-of-project interrogations.
Until then, the students will have to rely on circumstantial evidence, such as the mysterious
$10,000 which was withdrawn from Larkin and 共apparently兲 deposited into Madelyn Ackers’
account right after the contract was awarded to Larkin. The ultimate proof will be that $52,893.50
cash is withdrawn from the Larkin account and deposited in Madelyn Harris Acker’s account at
the completion of construction 共TH 6兲. This amount is exactly half the extra compensation received by Larkin and the subcontractors.
APPENDIX A
DIFFERENCES BETWEEN TBC I AND TBC II
TBC I
TBC II
Frauds
Cash stolen from ticket sales;
Ghost employees;
Kickbacks from equipment
purchases.
Improper revenue recognition;
Payments to related party for
poorly done repairs;
Concession theft; bid rigging
TBC Perpetrators
Ben Hill, office manager
Collusion between Phil Ackers,
president and Julie Roper,
his assistant 共and niece兲
Outside accomplices
Jessica Keller 共opens bank
account for Ben兲; Charlie
Thurgood 共Sports
Equipment, Inc.兲
Gerald Newbold 共Larkin
Construction兲; Freddy Harris
共Phil’s brother-in-law兲; Julie
Roper’s parents 共owners of
the Stop N’ Shop兲
Opportunity
Lack of internal controls
allows Ben to commit the
frauds
President Phil Ackers overrides
internal controls; Collusion
between Phil Ackers and
Julie Roper; Franklin
Kennedy is an absentee
owner.
(continued on next page)
Volume 25, No. 2, 2010
13
TBC I
TBC II
Motivation
Ben is motivated by desire to
live a more luxurious
lifestyle 共personal greed兲.
Phil has family members who
are financially dependent
upon him; Phil receives
bonus based on TBC
earnings; Julie is motivated
by personal greed and desire
to help her parents
financially.
Important TBC
Characters
Ben Hill, office manager;
Candie Harris,
receptionist; Myrna Myers,
ticket taker; Michelle
Shelton, accounting clerk;
Sam McCarty, equipment
manager
Phil Ackers, president; Julie
Roper, president’s assistant;
Holly Hope, concessions
supervisor
Accounting
processes and
other differences
All ticket sales are for cash;
Accounting records kept
on cash basis; TBC has no
real property
Ticket sales are for cash and
also on account; Monthly
accruals are recorded; TBC
is constructing a training
facility
APPENDIX B
BACKGROUND INFORMATION
The following can be used to answer student inquiries relating to personal facts about TBC
employees and other relevant characters.
Phil Ackers, President
Home address: 4945 Bobbin Brook Court, Tallahassee, FL.
Home description: The house sits in an exclusive older section of northeast Tallahassee.
Vehicles: Nissan Sentra, this year’s model. Toyota Camry, three years old.
Wife: Madelyn Harris Ackers.
Information from personnel file:
Age: 53.
Length of employment by TBC: 10 years.
Prior employment: Owner-manager, Pizzano’s Restaurant in Miami 共10 years兲, prior to that was
a major league ballplayer for 10 years.
Education: MBA, University of Miami.
Information that can be gleaned from Phil’s co-workers:
“Phil is married with two grown children. His wife has her own catering company, at which she
does very well.”
Information from public and private sources:
Criminal record: None.
Court records: No bankruptcies, no criminal action pending.
Property records: House on Bobbin Brook, Condo at Sandestin, two vehicles, a 35 foot sailboat, two jet skis.
IRS: Phil was audited extensively while at Pizzano’s, though no action was taken. If students
speak to anyone who knew Phil during those days, he or she will report that the IRS suspected
him of tax evasion.
Credit report: Phil has good credit, but a lot of debt, including debt to department stores,
Volume 25, No. 2, 2010
14
Dee and Durtschi
furniture stores, and loans on both vehicles. He also has student loans for his children’s education.
Candie Larson, Secretary/Receptionist
Home address: 3232 Baragona Acres Road #45, Tallahassee, FL.
Home description: Her home is in a medium range apartment complex.
Vehicles: Honda Accord, eight years old; Yamaha V-Star 650 motorcycle, six months old.
Age: 26.
Prior Employment: Red Carpet Realty, as a secretary for 5 years.
Education: Financial Certificate from Lively Vocational School.
Information that can be gleaned from Candie’s co-workers:
“Candie has never been married. She is always dating at least one of the ball players, often
more. She was born and raised in Perry, Florida. Her father is a vice-president at Capital City
Bank. She is the reigning Queen of the Crab Festival for Taylor County.
Candie dislikes Ben. She thinks he is a picky little man who does not trust her or believe she
has a brain in her head. She’s always complaining about being his dating service. Women are
always calling, including his ex-wife, asking for money. She spends a lot of her time outside of
work down at the playing field flirting with the players.”
Gleaned from past employer:
“Candie was a good worker, if a bit of a flirt. She left with good feelings all around.”
Gleaned from public and private sources:
Criminal Record: Series of speeding tickets, most on her motorcycle.
Court record: Three times in driving school to remove tickets.
Property records: One car, one motorcycle.
IRS: No action.
Credit report: Three credit cards: Burdines, Dillards, and Goodys, all at credit limit.
She owes $165 per month on her motorcycle.
Ben Hill, Office Manager
Home address: 1832 Jackson Bluff Road #25, Tallahassee, FL 共Villa Cortez Apts兲.
Home description: It is an older apartment, situated in a less prosperous part of town.
Vehicles: Mazda Miata MX-5 convertible, this year’s model, purchased after he received his
bonus from TBC.
Age: 42 years old.
Length of employment at TBC: 3 years.
Prior Employment, past ten years beginning with his most recent employer:
Three years at Tallahassee Doors, a small manufacturing firm.
Four years at the Florida Department of Transportation in the Financial and Auditing Department.
Two years at Holiday Construction, as an accountant.
One year at Krispy Kreme Donut Corporation, as an accountant.
Education: 4-year degree in accounting, no CPA.
Information gleaned from co-workers:
“Ben has been married twice 共that we know of兲. He had two kids with his first wife, but ended
up leaving her for wife number two. The second wife left him a few months ago; I think he had
to give her his house. He’s always dating someone or other, women are always calling here.”
Gleaned from apartment manager:
Volume 25, No. 2, 2010
15
“Ben’s always late paying his rent, but then most of my tenants are. He always eventually pays
it. Always in cash, but I give him a receipt.”
Court records: Two divorces. Divorce number one: his spouse was awarded $1,000 per month
in child support and alimony. Divorce number two: his spouse was awarded the family home
and car, but no alimony or child support.
Property records: Owns one car.
IRS: No actions.
Credit report: Shows a bankruptcy four years ago, and a debt of $14,000 in past alimony and
child support.
Information should students contact ex-wife #1:
“Benny started out nice enough, we had two wonderful kids. He had a good job. Then that
Dedrie came along. All the sudden it was lunches with her and dinners with her and then he ups
and leaves. For years I had been begging him to take the kids to Disney World, but there was
never enough money. We were saving for it, but then after the divorce, he suddenly has money
to buy Dedrie a huge diamond ring and even took her on their honeymoon to Disney World, of
all places! Then she divorced him and took him for everything including the house. Providence,
don’t you think?”
Information should students contact ex-wife #2:
“Benny just got boring. All he does is work, work, work. It was time for me to move on.”
Julie Roper, Assistant to the President
Home address: 1420 Seminole Drive #23, Tallahassee, FL.
Home description: Julie lives in an apartment near Tallahassee Community College with 3
roommates. It is a typical student apartment building. Not fancy.
Vehicles: Honda Civic, ten years old.
Parents: Jerry and Sarah Harris Roper. Niece to Phil Ackers as her mother is sister to Phil
Acker’s wife 共Madelyn Harris Ackers兲. Her uncle is Freddy Harris, brother of Phil’s wife.
From the personnel file:
Julie is 23 years old. She’s a full-time student at TCC.
She has been employed by TBC for just less than one year.
She is the niece of Phil Ackers. Prior to this job she worked at a convenience store 共owned by
her parents兲.
“Julie is a very hard worker. Everyone likes her, but she’s not very social with anyone, so they
know nothing about her personal life. Everyone thinks it is because she works here and goes to
school, so she always seems in a hurry. Part of her pressure may be that Phil had her take over
some things that Terri 共the person who held this job previously兲 would never do, such as
ordering concessions and collecting accounts receivable.”
Court records: None.
Property records: One vehicle.
IRS: No action.
Credit report: Julie has no credit cards. Her credit rating is good, if sparse.
Tucker Johnson, General Manager
Home address: 8086 Baby Farm Road, Tallahassee, FL.
Home description: Tucker’s house is firmly middle-class, in the country with several acres and
two horses.
Volume 25, No. 2, 2010
16
Dee and Durtschi
Vehicles: Ford Excursion, this year’s model; Honda Accord, three years old.
From personnel file:
Age: 55.
Prior Employment: St. Louis Cardinals assistant pitching coach, 11 years. He played major
league ball in his twenties and early thirties.
Education: Degree in Sports Management.
“Tucker is married, and has seven children. Only two kids are still at home. He drives a new car
every year, as payment for an advertising campaign he stars in for a local car dealership.”
Information gleaned from public and private sources:
Criminal record: One bar fight, 15 years prior.
Court Records: No bankruptcy or divorces. Assault charges dropped from fight.
Property records: One house, two cars, one powerboat, and three jet skis.
Credit report: Seven credit cards, only two with small balances.
Michelle Shelton, Accounting Clerk
Home address: 4571 Gautier Drive, Tallahassee, FL.
Home description: Michelle shares a nice townhouse with two roommates.
Vehicle: An eight-year old Toyota.
Age: 21 years old.
Length of time at TBC: 2 years. She works part-time.
Prior employment: Chick-fil-A in Tampa for three years.
Education: Michelle is a student at FAMU, seeking a business degree. She transferred two
years ago from Tampa Bay Community College.
“Michelle is trying to save up enough money to buy a new car. She’s a hard worker, and
everyone likes her. Michelle is going to school and sometimes studies at her desk when there
isn’t much work to do.”
Property records: One vehicle.
IRS: No action.
Credit report: Michelle has three credit cards, JCPenney, Burdines, and Victoria’s Secret. Each
carries a balance close to $200.
Larkin Construction
Established 1982
Randall Larkin, owner
1432 Main Street
Tallahassee, FL
Business License #3675841
Well-established commercial construction firm, has had many large contracts, especially in the
last 10 years. They recently hired Gerry Newbold, a former teammate of Phil Ackers, to act as
liaison between Larkin Construction and the Tallahassee BeanCounters. Phil and Gerry played
ball together and Phil was thrilled to reconnect with his old friend. They often went for drinks
or dinner together during the construction of the training facility.
Freddy Harris
Home address: 1414 Old Bainbridge Road, Bainbridge, FL.
Volume 25, No. 2, 2010
17
Phone: 235–7890
Business License #143201, Issued from Tallahassee, FL.
Freddy has been in business since 1972.
Freddy Harris is the brother to Madelyn Harris Ackers, Phil’s wife.
Freddy is also the uncle to Julie Roper.
Property records: He owns the property with the small clapboard house and barn from which
he runs his business. He purchased it in 1972 for $25,000 cash. He also has a 1997 Ford truck,
which he purchased used.
IRS: No action.
Credit report: Freddy has no credit cards.
Other Information:
Freddy works from a run-down old barn located on the same property as his home. If you were
to drive by you would see that the yard was cluttered with broken down lawnmowers and
four-wheelers. Freddy himself will usually be sitting out in the front yard on his lawn chair. He
will wave at you as you drive by. You will most likely decide to stop and chat with him. He
invites you into his shop, which is little more than a work bench cluttered with tools. However,
a small old desk in the corner piled with papers reveals a signed picture of him with Phil. Both
men are much younger, and Phil is wearing his baseball uniform. Phil gave him the $25,000 to
purchase the property he lives on. In prior years he wrote Freddy a $1,000 check each month.
That ended when Phil took the job at TBC.
Volume 25, No. 2, 2010
18
Dee and Durtschi
APPENDIX C
CALCULATION OF GROSS PROFIT PERCENTAGE FOR BONUSES PAID TO PHIL
AND BEN
Gross Profit Percent Calculations Used by Bank for Mortgage Loan
Revenue
31-May
30-Jun
31-Jul
30-Aug
30-Sep
Game Revenue
Fundraising Revenue
League Revenue Sharing
Total Revenue
152,130.08
18,582.00
19,513.00
190,225.08
314,995.35
4,175.00
7,400.00
326,570.35
134,804.88
22,550.00
25,000.00
182,354.88
260,521.77
12,975.00
18,300.00
291,796.77
281,026.58
13,025.00
20,000.00
314,051.58
Expenses
Cost of Goods Sold
Payments to visiting Teams
Fundraising Expenses
Away Game Expenses
Operating Expenses
Game Equipment Expenses
Total Expenses
20,386.10
0.00
4,628.00
16,387.00
138,751.24
7,716.39
187,868.73
38,723.15
13,500.00
2,342.11
6,756.00
180,014.72
4,119.34
245,455.32
17,201.40
0.00
4,004.25
19,313.00
137,947.47
0.00
178,466.12
29,298.05
8,000.00
5,009.38
14,192.00
140,561.95
2,394.78
199,456.16
49,099.95
38,500.00
4,757.88
13,308.00
220,276.91
10,870.79
336,813.52
Gross Profit Percent with:
Fake Accounts Receivable
Gross Profit Percent without
1.24%
9,540.00
24.84%
49,500.00
2.13%
8,400.00
31.65%
43,008.00
⫺7.25%
0.00
⫺3.98%
11.41%
⫺2.59%
19.83%
⫺7.25%
(continued on next page)
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REFERENCES
American Institute of Certified Public Accountants 共AICPA兲. 2002. Consideration of Fraud in a Financial
Statement Audit. Statement on Auditing Standards No. 99. New York, NY: AICPA.
Beasley, M., J. Carcello, and D. Hermanson. 1999. Fraudulent Financial Reporting: 1987–1997. Study
commissioned by the Committee of Sponsoring Organizations of the Treadway Commission. Available
at: http://www.coso.org/publications/FFR_1987_1997.PDF
Volume 25, No. 2, 2010

Return of the Tallahassee BeanCounters: A Case in Forensic

Transcription

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