Case Study (Set 1)

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Ramapo College Of New Jersey *

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ACCT-610

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Accounting

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Apr 3, 2024

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Jared Dimock Forensic Accounting Professor Pettit Case Study 1: What Is A One Cent Error Worth? Question: How can a one-cent error caused an IRS penalty? Is it not immaterial? The CPA, who had been in practice for more than 30 years, approved the reconciliation even though it was out of balance, which resulted in an IRS fine for the one cent error. Since the accounting company was also assembling the financial statements and tax forms, this ought to have been discovered. It is improbable that rounding will result in an inaccuracy of one cent. This would not be irrelevant in forensic accounting because a cent out of place indicates possible fraud. Since the bank statements are consistently accurate, it suggests that someone might be changing the books. Case Study 2: That Trusted Employee Question: How did this fraud occur? Discuss segregation of duties. Discuss opportunity in the fraud triangle with respect to this situation. Whether it is a mom and pop shop or a large corporation, segregation of roles is an important implementation that needs to be included in any firm. As jobs and responsibilities are divided inside an organization, segregation of duties can prevent potential fraud and error. In this scenario, fraud may have been avoided if Jim had someone approve the checks and someone else deposit the check. Jim ought to have put in place an authorization system as well. As a result, some actions can only be done with permission from one individual. Stacy shouldn't be permitted to deposit the check or enter the transaction into the system if she has permission to write the blank check. If Jim had established a dual signature method, the scam might have been avoided in another way. Checks over a particular amount would therefore require two signatures. Stacy would have been unable to write the checks to herself if Jim had used this kind of segregation of duties. Finally, Jim ought to have done the bank statement reconciliation himself or hired a third party who was not involved in the check and cash payments. Opportunity is one of the main three elements in the fraud triangle as people try to commit fraud when companies have certain faults such as bad internal controls weak accounting measures. However, it is feasible to prevent any prospective fraud by removing the opportunity to do so. There were numerous strategies that Jim's business could have used to stop potential fraud. Applying efficient internal controls, such as having preventative and detective measures, would have been one solution. If there had been a system of authorization and segregation of duties, Stacy would not have been able to write checks to herself. Creating a successful whistleblower system can also aid in the eradication of fraud. If someone in the energy service company in Baton Rouge did have a reliable method for reporting wrongdoing, perhaps another worker could have called in a tip if they had suspicions about Stacy's actions. Last but not least, creating a sense of impending punishment helps set the tone. Employees are less likely to violate policies and procedures if they are aware that they will be disciplined for even the tiniest infraction.

Case Study 3: Employee Fraud at Miami Rehabilitation Center Like fuel, air, and heat come together to make fire, the likelihood of fraud increases when the three elements of the fraud triangle come together. Analyze how the three elements of the fraud triangle are important and how all three elements were present in Helen’s case Like fuel, air, and heat come together to make

fire, the likelihood of fraud increases when the three elements of the fraud triangle come together. Analyze how the three elements of the fraud triangle are important and how all three elements were present in Helen’s case Like fuel, air, and heat come together to make fire, the likelihood of fraud increases when

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the three elements of the fraud triangle come together. Analyze how the three elements of the fraud triangle are important and how all three elements were present in Helen’s case Question 1: Like fuel, air, and heat come together to make fire, the likelihood of fraud increases when the three elements of the fraud triangle come together. Analyze how the three elements of the fraud triangle are important and how all three elements were present in Helen’s case The three elements of the fraud triangle—pressure, opportunity, and reasoning—are essential for illuminating the fraudster's motivation. The first element is pressure, which can be caused by a variety of things, including problems with money, personality faults, and stress at work. In this circumstance, Helen appeared to be having financial difficulties. Helen may have felt compelled to accept the money for a down payment on a property because she shared a home with her parents and a drug-addicted husband. In addition, Helen might have felt obligated to accept the money given the high expenditures of her children's medical appointments' treatment. Helen apparently struggled at work and felt underappreciated for her role, which may have impacted her decision to steal the money. Another element of the fraud triangle that played a role is opportunity which gives the circumstances that allows a person an opening to commit fraud. The reason Helen was able to allow herself to commit the thieving of $1,400 was sue to the companies, lack of controls, failure to discipline employees, and an absence of an auditing procedure. These factors all contribute to the development of another fraud risk. Preventative and investigative measures must be incorporated into the business structure to avoid such problems. As a result, reliable internal controls are necessary. In order for internal control to be successful, the leadership team must set an example, establish the tone, make wise personnel decisions, and maintain a transparent organizational structure. Juan didn't run background checks or discipline staff for bad behavior, which clearly indicates a lack of an efficient

management structure. Employees are much more likely to perpetrate fraud if they believe they are not being taken seriously. The manager never checked on Helen's progress, therefore there was also no visible organizational structure. A business needs a strong management accounting system to prevent and catch fraud. This is done by making that the transactions are real, authorized and categorized correctly, reported on schedule, and in the correct amount. Maria, the manager, would have double- checked the bank deposits with the office copy to make sure that the right amounts were entered if there were proper accounting procedures in place. Finally, measures to decrease opportunities include task segregation, physical security, independent inspections, and records. Patients' co-payments were collected by Helen, who then posted and deposited them in the bank. Within the corporation, there was no separation of labor. Finally, rationalization refers to a fraudster’s attempt to defend their behavior. The most frequent defenses used by fraudsters are that they are deserving of more, that it is for a noble cause, or that they will pay back. It’s possible that Helen wanted a raise because she felt undervalued and was motivated to commit fraud. Helen’s response might have been that she believed she wouldn’t be found because there was no supervision of the area and she was never away.

Question 2: In 2006, The Committee of Sponsoring Organizations (COSO) published a small company version of their 1992 Internal Control – Integrated Framework model to help small public companies improve their internal control systems. The basis for this model is that internal control is composed of five interrelated components. Control activities represent one of the five components. Define control activities and discuss at least two control activities and their application or lack of application in MRS and MSB’s case. Policies and procedures are put into place as part of fraud control efforts to help with fraud identification and prevention. Two further sorts of control mechanisms that were absent from the MRS and MSB organizations were external audits and role separation. There was no independent audit inside the company as a result of Maria's inability to effectively monitor and control Helen. Furthermore, it didn't appear like there were any yearly employee assessments. Helen also didn't take any days off while she was working. There was therefore no chance of a temporary work rotation happening. The greatest loss of control resulted from a lack of role delineation. Helen was given the responsibility of gathering cash and cheques and depositing the funds into the bank account. After that, she would enter the data into the software. Question 3: Two other components of COSO’s model are the control environment and monitoring. Name and describe at least three recommendations that you would make regarding these two components. The working style and management philosophy must be communicated to the workforce. Juan and his partner must explain the need for controls through their management style. Any organization's control environment is crucial because it establishes the tone for everyone who works there. The control environment can result in either a hostile or a friendly environment, depending on how the leadership sets an example. The creation of an ethical manual outlining the organization's code of conduct is one suggestion. Additionally, roles, responsibilities, and tasks should be conveyed to employees in order to clarify their job duties and avoid function omissions and task duplication. The provision of a pre-authorization process for transactions exceeding a particular threshold is another option. The likelihood of fraud would be decreased by this method. Juan should also conduct ongoing employee supervision to make sure that tasks are carried out in the proper order. Last but not least, ongoing staff evaluation is necessary to ensure that tasks are completed as assigned and corrective actions are carried out on schedule. Question 4: Brainstorm about the red flags that Juan and Maria missed during the commission of this financial fraud. Describe how you would go about conducting a forensic audit of Juan’s records. Juan and Maria disregarded a number of warning signs that would have indicated the possibility of fraud. The following are some of the indications that may have been drawn from this case: Helen's past, especially being a part of one of Juan’s partner’s companies has raised multiple alarm bells. The warning signs displayed by an employee's personal situation frequently include red flags. Due to her children's medical expenses and her husband's substance misuse issue, Helen was having financial issues. As for how I would go about conducting a forensic audit on Juan’s records, I would perform a forensic audit of Juan's files by looking over and reconstructing the company's financial accounts. I would utilize forensic accounting to obtain third-party documents, including insurance payment

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information, and compare them to bank statements and credit card receipts because Juan's financial statements were untrustworthy. Juan's tax returns would be compared to the financial accounts I rebuilt from the bank statements in order to identify any missing amounts. A vertical and horizontal study would also be done by me. By analyzing trends and providing clarity on the company's financial patterns, this strategy would allow me to quantify actual losses. The expense-to-revenue ratio should remain constant, as would be made clear by the vertical analysis. An increase in expenditure ratios may indicate fraud. Any variation in the horizontal revenue ratio (cash, credit card, and insurance reimbursements) could indicate fraud. Question 5: With regard to segregation of duties, what recommendations would you make to Juan and his partner to improve this control activity? In terms of recommendations for Juan and his partner to improve control activity, I would say that to Juan that he should do weekly checks of their company’s financial records and data to make sure everything is up to date. In addition, even though that the culprit didn’t get arrested, I would suggest to Juan to have his employees do logs of what they worked on each week. By keeping track of what the employees’ have done, it will allow Juan to not only keep track to make sure all the companies financial records and balances are up to date. Additionally, it will also narrow down any possible suspects in terms of the company’s workforce in case a fraud ends up happening again and that they can be able to find the perpetrator a bit easier. Question 6: Analyze how the accounting system is both a preventive and detective control. A corporation can use a horizontal analysis as one of its fraud detection and prevention tools. Any discrepancies in the cash accounts would be exposed using this technique. The business should also set up an accounting system to monitor all transactions and make sure that all deposits are tracked. Each transaction must be appropriately identified, noted, and validated. Additionally, in order to spot red flags, a vertical examination of the relationship between these accounts may be necessary. The ratios of patient copayments and third-party payments ought to be uniform. Any difference between these accounts may be cause for concern.