ACC 760 – fraud examination paper – Paper on fraud examination course for master degree
ACC 760
You must answer both questions. Your answers should not exceed four pages per question and must be double-spaced.
QUESTION 1
Bob and his brother Bill, owners and operators of Hometown Tractor for 30 years, were close to retirement. A local bank had continually financed the company, which had an inventory of farm tractors worth millions of dollars. The owner’s wives, Jane and Julie, shared accounting duties for Hometown Tractor. Jane would approve invoices. Julie would prepare the checks and either Bill or Bob would sign them. The receipt and payment cycle included a series of checks and balances with no one employee responsible for the entire cycle.
Jane and Julie retired from the business, and James, Bob’s son, assumed the bookkeeping responsibilities. James, 30, had been working in various jobs at the business since high school. Now the brothers entrusted him with all aspects of bookkeeping for the business: accounts payable, accounts receivable, payroll, and all account and bank reconciliations. They gave him check-signing ability and a business credit card.
Soon after becoming the bookkeeper, James married and began a family. As his personal monthly bills increased, he found it difficult to maintain the lifestyle he had known when he was single and living with his parents. By 2009, Hometown Tractor was experiencing cash flow problems. The company laid off several employees and reduced benefits. James concurred with the owners’ conclusion that the financial difficulties were attributable to a downturn in the economy.
What possible opportunities does James have to commit fraud? Using the fraud triangle, identify the signs which could signal a possible fraud. But he certainly wouldn’t steal from his own parents. Would he?
QUESTION 2
Dog Daze Rescue (DDR) was formed in January 2010 as a New York not-for-profit corporation. Initial funding for the organization came from its two founders, Tyler and Jenna, a husband and wife team with more heart and love for dogs than business sense. J They provided loans in the total amount of $35,000 to kick start the rescue.
The concept and the mission were relatively simple – Take unwanted, neglected, abused, stray and homeless dogs from southern shelters and bring them north for adoption, where demand for dogs far exceeded supply. In its first year, DDR “saved” and placed 335 dogs. By the end of its second year, that number had almost doubled to 615. In 2012, over 850 dogs were transported north and found loving “forever” homes. And at the end of 2013, the rescue proudly boasted it had saved over 3,800 dogs.
DDR collected adoption fees for each dog placed ($275 for adults; $350 for puppies). All dogs were fully vetted (medical exams, vaccines and spay/neuter) before placement. As the organization gained public exposure, eventually becoming the first place to start when looking for a new canine family member, adoptions and donations began to increase significantly. By 2013, total revenues had grown to over $400,000, much of it received in cash.
The founders, having pinched thousands of pennies as DDR grew rapidly and painfully, struggled to run the operation. After payment of veterinary and transportation expenses, little money was left to pay for staff other than full-time caregivers for the dogs housed at the rescue’s 3,500 square foot facility in the outlying suburbs of a not-so-major city. Dozens of volunteers helped the two full-time employees who were responsible for feeding, walking and the overall general well-being of the dogs. Two individuals assisted with the actual adoption process, which included collection of fees. Other volunteers screened prospective adopters, staffed adoption and other fundraising events and helped with routine work at the rescue. Jenna, a lawyer and CPA, performed the accounting and legal work for the organization; Tyler managed communications, including the organization’s website and social media accounts. There were three other members of the Board of Directors (in addition to Tyler and Jenna), but the relationship between these directors and the founders had become tense and distrustful.
Significant cash from adoption fees and donations was collected at the rescue’s facility. All cash and checks were held until Jenna physically picked them up (usually on a daily basis). She made all bank deposits, prepared the “dog” log (a record of incoming and outgoing pooches, including adoption fee tracking), paid all expenses and reconciled the company’s bank accounts. Donors made charitable contributions through cash, checks and PayPal via a link on the organization’s website; in 2013, those contributions exceeded $30,000. Tyler was the only individual with on-line access to bank accounts and PayPal. All PayPal transactions were memorialized in detailed records which reconciled to DDR’s bank account.
Tensions between the founders and other Board members reached a breaking point in the Spring of 2013, at which time Tyler and Jenna resigned. The Board was aware that certain “volunteers” had actually been receiving some cash payments for the time they “worked” at DDR. Concerned that these amounts needed to be reported as wages (W2) or other miscellaneous income (1099), the Board sought to quantify the payments. Jenna meticulously accounted for every adoption fee received by DDR. All checking account disbursements were appropriately supported. All bank reconciliations were properly prepared and documented.
The Board was unable to determine how (and how much) Jenna paid these individuals. Can you? And if Jenna could so successfully conceal these payments, what else might she have been hiding?
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