Homeworld of FRAUD EXAMINATION

Over time, the No-Name evolved into sport’s themed, bar and grill, entertainment establishment. The building contains three distinct sections, the Restaurant area, the Sports Bar, and the Entertainment venue.

The Restaurant is a full-service entity with a casual dining atmosphere akin to the one of the named chain restaurant establishments. The menu offers a standard, broad based American cuisine with selections including hamburgers, sandwiches, steaks, fish, etc., along with limited international items including quesadillas and egg rolls. The area can seat up to 100 patrons at any given time with the check for a party of two averaging around $65. The majority (90%) of the payments were in the form of charges to either a credit or debit card.

The Sports Bar contained pool, billiard, and foosball tables (each coin operated); dart boards, punching bags and other games of skill (all playable at no charge); and a large selection of video and arcade games (also coin operated). It also contained multiple areas with comfortable seating and large screen televisions for individuals wishing to watch sporting events. The menu was a limited version of the Restaurant, focused on mainly quickly prepared items more akin to a combination of fast food restaurant items and an assortment of appetizers. The section could easily service 250 patrons at any given time with a maximum capacity of 350 persons. On an average weeknight, the area saw approximately 75 customers with this number expanding to 200 on the weekends. The average customer spends around $35 per visit with the majority of the tab related to beverages.

The Entertainment area was the original section of the establishment and provides a wide variety of night-time attractions including live bands and disc jockeys. The area contains a removable stage and dance area to accommodate a wide venue of activities. While On special occasions

The Grill had a capacity of 1,200 patrons. On an average weekday the grill had about 200 patrons for lunch and around 350 for dinner. On a normal weekend night, 900 to 1,000 customers were typically served.

Don Kirby was the owner and general manager of the No-Name. He was 47 years old and had been the owner and general manager for 23 years, after working for and then taking over the business from his father, who had passed away unexpectedly. Don had never attended college. He learned the ropes of the Grill initially from his father and then through trial-and-error after his father’s death. He was average height with a stocky frame, and he prided himself on staying in good physical shape. Don was a friendly, personable man, with a fairly easy-going personality, and he got along well with most people. He had a wife and three children (two boys and a girl – in that order). His children’s ages ranged from 16 to 21 at the time that Don sat in his office wondering what to do about Jesse Hawkins. Don’s oldest son attended a local community college but also put in 10 to 15 hours a week at the Grill. He had no managerial or supervisory responsibilities and usually worked as a bouncer.

Over the last decade, Don had tried to delegate more of the daily responsibilities of the Grill to his operations manager, the floor supervisor, and the office manager. He had made a promise to his wife to spend more time at home with her and their kids. In the first years of his marriage and when his children were young, Don spent long days at the Grill. He typically worked until midnight and sometimes through the early morning hours. As Don put it, “I worked too many hours when I worked nights at the Grill. But now, well, those days are behind me. The last 10 years or so, I have made it a point to complete most of my work during daylight hours.” Nevertheless, he still dropped by the Grill now and then in the evenings “to keep his eyes on the things and to help out when necessary.”

MANAGEMENT AND SCHEDULING

Though Don had never formally developed an organizational chart, Exhibit 1 depicts the basic organizational structure of the employees at the Grill. Also, Don had never developed written job descriptions nor had he developed any formal policies and procedures other than a drink recipe book for his bartenders. He felt the Grill was small enough that he and his staff collectively could get things done without a bunch of unnecessary formalization. Whatever work needed to be done, got done, by whoever might be there to do it at the time.

Don has two direct reports, Bruce Samson, who was operations manager and basically ran the show, especially during nightly operations when Don was away. In addition to running Grill operations during the peak hours of business, Bruce also performed most of the personnel functions associated with the Grill. Bruce was also responsible for activities such as scheduling, training, and placing workers into specific positions of server, bartender, and security/bouncer. Don, Bruce, and Cathy were the only full-time employees of the Grill. All other workers were hired on a part-time basis, including the floor supervisor. The floor supervisor occasionally filled in when both Don and Bruce were not at work.

The other direct report was Cathy Werner who handled all the administrative functions including the following:

· Accounting for all cash receipts, which included preparation of daily deposits and reconciliation of sales to deposits, and reconciliation of the monthly bank statement,

· Processing disbursements for all purchases, to facilitate this, Cathy was given a company credit card with a $10,000 spending limit,

· Performance of all payroll functions including check distribution,

· Maintaining inventory levels, including cycle counts, and ordering all supplies including food and beverages,

· Preparation of monthly sales and use tax and payroll tax returns,

· General Ledger maintenance including preparing and posting all monthly standard and adjusting journal entries. At the end of the fiscal year, all General Ledger information is submitted to a CPA firm for income tax preparation.

Don typically began work at 9:00am; Cathy arrived at 7:30am and Bruce normally did not arrive until 2 or 3pm. Although some overlap did exist, much of the time only one of the three managers was present at the Grill. Moreover, because the Grill was open 7 days a week and Don and Bruce had different days off while Cathy worked a Monday through Friday schedule from 7:30am until 4:30pm, Don believed it was not practical to become involved in the daily operations of the Grill. Collectively, all three shared many responsibilities and Bruce did not seem to mind this at all. From his perspective, there was never a shortage of things for him to do and he welcomed any help the got from Don and Cathy.

Employee turnover was some-what high, generally around 50 percent, because many employees quit when a full-time job became available elsewhere or left due to graduation from the local college. In addition, business at the Grill was quite variable. For example, in the first week of May, the Grill only needed 4 kitchen staff, 15 servers, 5 bartenders, 5 bus persons, and 6 security /bouncers each day. However, on the last week of May, the ‘Harvest Days” festival (the annual celebration of the Harvest industry) the Grill daily needed over 8 kitchen staff, 30 waitresses, 10 bartenders, 10 bus persons, and 12 bouncers for the Harvest Days crowd. During times like these, Bruce turned to primarily temporary help, but also some patrons of the Grill who wanted to work once in a while and members of the Harvest Days steering committee.

HIRING AND TRAINING

Potential applicants filled out a general application form. This form was placed in a pile to be screened when employees were needed to fill vacated positions. Most potential employees stated the position they wanted to fill, such as kitchen help, servers, bartender, or security/bouncer. Don and Bruce only allowed men to serve as bouncers because of the nature of the job. Before an employee could become a bartender, he or she had to first start as a bus person then move to work as either a server or as kitchen help. The Grill trained bartenders in-house because standards and practices were inconsistent across the bar business. Specifically, bartenders were trained to make the expensive, specialized drinks that were only available at the No-Name. This meant that the bar required rather unique ingredients that were very difficult to acquire. Therefore, Don kept the alcohol in a separate closet with limited access. Potential promotion to a bartender position generally was based on an employee’s work performance.

Employment applications were screened on a first-come, first-served basis. For example, when a position for a bouncer became available, Bruce examined all of the employment applications on file and screened them down to a shorter list of those he considered as potentially qualified to fill the position. After compiling the list of potential employees, he began the process of setting up interviews with the applicants. This was difficult because most of the applicants had already accepted positions with other employers rather than wait for the part-time jobs offered at the Grill. Bruce set up interview times with those still interested in employment with the Grill. Occasionally, Bruce and Don would deviate from their normal hiring procedure and hire someone without considering other applicants. They had even been known to ask someone they knew or even just met to apply. “Sometimes, when somebody good comes along, you have to grab them while you can,” Don had stated on more than one occasion.

These variations aside, during the typical interviewing process, Bruce provided a brief overview of a job’s duties, expectations of employees, salary information, company policy concerning vacation time, and the obligation of the employees to give the Grill adequate notice if they were unable to work their shift. Bruce obtained information about each applicant’s previous job experience and other qualifications. From these interviews, an applicant was selected and put to work immediately. The other applicants were ranked and put on a waiting list to be called with the next available position opening. Usually, by the time a new position opened up, these potential employees had already found full-time jobs. This often forced Bruce to go through the tedious process of screening and calling new applicants every time a position opened up.

Since training occurred on the job, new employees (with the exception of kitchen staff) were paired with Kevin Anderson, who was responsible for showing the new employees what was expected of them. Kevin usually worked with the new employees for the first few days of their employment to ensure that they had learned the ropes. For example, Kevin taught new servers how to hold their trays, how to take an order and give it to the bartender, the price of each drink, and the locations of the different sections of the Grill. Before bartenders were trained, they usually worked as servers to learn the procedures. From this early job experience, Kevin was able to determine which employees had the potential to become bartenders. He further examined each employee’s work attitudes, habits, and rates of absenteeism to determine which server would be moved up into a bartender position. This was an important function within the Grill because of the time required to train a bartender to meet the demands of a normal workday. Kevin recommended potential bartenders to Bruce. After being selected, new bartenders completed a 2-week training period during which they were paired with an experienced bartender for a few hours every night. The experienced bartender taught the trainee how to take orders and mix drinks. Trainees were also provided with a drink recipe book to memorize on their time off.

A NEW POOL OF WORKERS – THE HAWKINS FAMILY

Jesse Hawkins, who worked full-time at a local Lumber Yard, was an occasional patron of the Grill. Jesse had shown interest in earning extra income by helping out at the Grill, so Don took it upon him to hire Jesse in May 2001 to help out with the demands of Harvest Days. Hawkins was very helpful to the staff and the managers. He offered to do odd jobs that needed to be done around the place, such as fixing a leaking sink or hosing off the sidewalks. Jesse was very dependable and reliable. He often offered to work the shifts that were unpopular, such as the Sunday night shift. After working sporadically at the Grill for many weeks, Jesse was offered a job with more hours as bouncer.

Jesse was a sizable man who stood about 6’2” and weighed at least 230 pounds. He was in very good shape for a man in his early 40’s. Jesse was very active, which clearly contributed to his good physical condition. He loved dirt bike riding, snow-mobiling, skiing, horseback riding, fishing, hunting, and camping. Jesse enjoyed participating in these activities with his wife Mary, two sons, and friends. Jesse’s love for these more “active” pastimes was equaled by his love for people. He had a very flamboyant personality and some people considered him to be somewhat charismatic. Others, however, thought that Jesse was a bit too direct at times and sometimes acted a little “off the wall.”

Jesse very much liked working at the Grill because it gave him a chance to be around people who were having a lot of fun, except maybe during those times when he had to physically bounce unruly patrons from the Grill. Working at the Grill was especially appealing to Jesse because it was in such contrast to the repetitive boring work he performed at his day job for the Harvest company.

Over time, Jesse and Don became very good friends. They both enjoyed many of the same activities and were gun enthusiasts. Moreover, Jesse’s and Don’s sons were close in age. Because of their common interests and the similarities in their kids’ ages, their families got together often. They all became good friends, and Don’s and Jesse’s friendship appeared solid and lasting.

After working for the Grill for a couple of years as a bouncer, in July 2003, Jesse was also put in charge of making out the weekly work schedule. Schedules were made a week in advance, but most weeks someone called in sick at the last minute or just did not show up for work. Jesse had to ensure that there was a full crew of employees working each night, even if that meant calling in new applicants to work for the established list created by Bruce.

Two months after Jesse was put in charge of scheduling, the individual who cleaned the Grill during the early morning hours turned in his 2 weeks’ notice. Don asked Jesse to help Bruce out with filling this vacancy by looking through the new employment applications and to ask current employees if anyone was willing to take on the job of cleaning the Grill after it closed at 2am. Jesse had a difficult time finding anyone to fill the position and eventually suggested that his wife, Mary Hawkins, be hired to do the cleaning. Don agreed to the idea, and Mary was hired to clean the Grill.

Mary was very reliable and thorough with her cleaning. Jesse Hawkins informed Don that she would also make a good bartender because of her work ethic. Bruce did most of the hiring and typically decided which workers would become bartenders. However, because Don and such as close friendship with Jesse, Don took a much more active role in personnel matters as they related to Jesse. Though another person might consider Don’s involvement to be an infringement on Bruce’s authority, Don knew Bruce would not mind and would probably appreciate the assistance. Besides, Bruce had recently mentioned that the Grill needed another bartender.

Don happily agreed to have Mary become more involved and expanded her responsibilities to including bartending. Mary caught on quickly to the skills of being a bartender and soon became the main bartender in the Grill, working Thursday, Friday, Saturday, and Sunday. Because she was working 4 days a week at bartending, Jesse suggested that they needed to hire another individual to help Mary clean the Grill at night. Don agreed, and soon Carl Hawkins, Jesse’s son, was hired as a bouncer and janitor. His job was to work as a security person on Thursday, Friday, Saturday, and Sunday, the busiest nights of the week, and then stay after closing on those nights to help Mary clean the Grill.

SIGNS OF TROUBLE

Not long after Jesse Hawkins was delegated the duty of scheduling work, Bruce noticed that employee turnover was rapidly increasing and he informed Don about this. The newer employees quit after only a few weeks of work and long-time employees were also leaving in greater numbers. When Don asked a few of the longer tenure employees why they were leaving, a majority stated that they were not getting as many hours as they had earlier. One employee exclaimed, “Jesse is playing favorites and giving most of the hours to employees he likes. I can’t afford to wait around to see if I get more hours. This just isn’t fair.” Other employees expressed similar perspectives. Several of them indicated they voiced their issues with Cathy when they received their paychecks, but she did not seem to take much interest in their concerns.

Don was curious to see if the employees’ claims were true. He asked Cathy for the last 6 weeks (which included Harvest Days) of employee payroll records so that he could check the hours each received during the week. Cathy gave Don the 6 weeks that fell prior to Harvest Days. She indicated that she had not reconciled or filed the payroll accounts and until she did, the information would not be in a form that Don could analyze. While this made Don curious, he went ahead and took the information Cathy gave him. Although there were over 30 people on the payroll at the time, Don discovered that the same 15 to 20 employees were on the schedule most days and that some of them were working 40 or more hours per week. This was inconsistent with the Grill’s practice of rotating employees in and out of the schedule. After making this discovery, Don called Jesse into his office to discuss the situation. Jesse claimed he was unaware that he was not giving equal time to all of the employees and apologized for his oversight. He promised to correct the problem immediately. Don then approached Cathy and asked her to expedite the processing of the payroll records for the other weeks he had originally asked for, the ones that included Harvest Days. She said she would get the information to him as soon as she received the bank statement and had reconciled the account.

Several months after the hiring of Mary and Carl, Don noticed that the Grill was going through more cleaning supplies than normal. For instance, the Grill usually went through one box of toilet paper in a normal week. According to the local supplier’s billing statement, the Grill was now working its way through over three boxes a week. Don also noticed a similar pattern with cleaning supplies such as towels, disinfectants, and hand soap. The supply costs were more than 20 percent higher than normal through Grill revenues and patronage had not increased over that same period. After his discovery, Don discussed his finding with Bruce. They agreed that the increase in costs was unusual but were not sure what to attribute it to and dropped the matter.

During the same period, Don noticed that Jesse Hawkins was bringing supplies from his other job at the Lumber Yard to the Grill. For example, one time Jesse brought a full 24-pair package of leather gloves to give to the other Grill employees. Other times he brought bags of pens, earplugs, dust masks, and safety goggles to work. When Don asked Jesse where he was getting all of these items, he casually stated that his foreman from the Lumber Yard had given them to him as “perks.” Don let the matter drop.

For a few more months, Don watched the supply costs increase more and more. He wondered how usage could increase at such a rate. Finally, deciding that something needed to be done about the matter, he personally conducted an inventory of the supply closet and was alarmed by what he discovered. Although he had received his weekly cleaning supplies delivery 2 days earlier, he found that over three fourths of the supplies were already gone, leaving only a quarter of the supplies to cover the busy weekend operations. He knew that there were only five keys to the supply closet in circulation. Jesse, Mary, Carl, and Cathy each had a key and he kept the fifth key locked in the office safe for emergencies. At this point, Don finally realized that he had a serious problem.

SETUP OF SURVEILLANCE SYSTEM

Don decided to set up a secondary surveillance system at the Grill to see what was happening when Carl and Mary were cleaning and to discover more about the disappearing supplies. He installed few additional cameras that were well hidden and unknown to anyone else, including Bruce and Cathy. Initially, he focused one on the supply room and the others to scan continuously the whole building throughout the night. He ensured that there were long-running tapes in the recorders and videotaped the Thursday, Friday, and Saturday after-hour cleaning sessions. On Sunday morning Don sat down to review the tapes. For each of the three preceding nights, Don watched the same sequence of events.

The Grill closed at 2am. Within a half hour of closing, Carl and Mary were the only two left in the building. For that first hour or so, Carl did some cleaning while Mary finished her cleaning at the Grill or helped Carl with some tidying up. This seemed normal enough, Don thought to himself. But then things got really interesting. First, Don observed Mary leaving the Grill each night before 3am despite her being paid to work until 5am. As Mary left, Carl followed her to the door with a rope in his hands that he then used to tie the door shut so that it could not be opened from the outside. After tying the door closed, Carl walked over to the candy machine. He rocked it back and forth until several candy bars fell to the opening at the bottom of the machine. After eating the candy, Carl then sauntered over to the jousting machine, a game that only took dollar bills. Don watched as Carl crawled up into its hollow center. Don realized that Carl was stealing the dollar bills out of the machine. After raiding the punching bag machine, Carl headed over to the Bull Pen (the padded area where the jousting machine was located) to lie down and sleep. Don watched Carl sleep for a while but then fast-forwarded the tape. He noted that Carl slept for approximately 2 hours each night in the Bull Pen. Finally, at 5am, the phone rang and stirred Carl from his sleep. “OK, OK, I’m awake,” Carl shouted into the phone as if intoxicated. At that point, Carl walked over to the time clock and clocked Mary out. Carl then hurried to clean the Grill during the next few hours. He left the Grill at approximately 7am each morning, a couple of hours before Don’s arrival.

Curious about who had awakened Carl, don looked down at his caller ID and found that the call was coming from the Hawkins’ house. It appeared that Mary was calling at 5am to wake Carl. Don was amazed at all he had viewed. “How could they do this to me? Does Jesse know about this? How could he not be aware? Well, I’m just going to have to get to the bottom of this,” Don thought.

Don determined he needed to monitor Mary’s bartending activities. He hired two bonded detectives to observe her for a while to see if they could catch her doing anything worse. The following Friday, Saturday, and Sunday nights, the detectives watched her activities. Both detectives reported that they had observed Mary giving free drinks to her friends, pocket cash, and not ringing up money on the register for some of her sales. Both of the detectives signed sworn written statements documenting Mary’s criminal activities.

Don also wanted to obtain video evidence of Mary stealing from the Grill before he confronted Jesse with the evidence. Don set his surveillance cameras to run at about 5pm the next Thursday to see if Mary continued to skim the register. Mary was consistent; the video caught her giving away free drinks, pocketing cash, and failing to ring up all sales on the register. But the video caught more than expected. To Don’s surprise and disbelief, he watched as Jesse, too, stole from the Grill. On the video, Jesse was sitting at the bar and talking to a man who was later identified as Jesse’s relative. After talking to the man for several minutes, Jesse walked around the bar and reached under it and grabbed three unopened bottles of liquor – the high priced stuff. He placed the bottles in a brown paper bag and then handed it to his companion. The man stood up and shook Jesse’s hand before he left. No money was exchanged for the liquor.

Don’s secret video surveillance also captured Carl taking large quantities of supplies from the supply closet. The videos showed Carl taking these items to the back door of the Grill and then out of the building. Don’s extra surveillance had worked. Collectively he had videotape evidence of all three of the Hawkins’ stealing from the Grill.

The camera’s also caught something strange. Each day at around 7:45am, Cathy would go to the alcohol storage closet with a small plastic bottle (only she, Don and Bruce had keys to this particular closet). She would be in the closet for a very short time, only a minute or so, then leave with the bottle. Don could not tell if the bottle contained anything.

MEETING WITH JESSE

On Friday afternoon, Don called Jesse into this office. He confronted him with what he had seen and what he knew. Don told Jesse about the detectives’ reports, the video of his son Carl stealing from the vending machines and supply room and sleeping on the job, and about the videos of Jesse stealing the liquor from the Grill along with Mary’s illegal activities. Jesse became angry and demanded to see the tapes, asserting that it was his right to see the evidence firsthand. Don refused to share the evidence and told Jesse that he and his wife and son had better not show up at the Grill that night or the rest of the weekend. “I’ve yet to decide what to do at this point,” he told Jesse. “For now, just get out of my sight.”

WHAT NOW?

The next morning, while sitting in his office, Don thought through his situation. First, Don wondered about what specific actions he should take regarding the Hawkins family. Second, and more important, Don was uneasy about how Jesse and Carl might respond to any actions he might take. Don knew that Jesse could fly off the handle and become violent. This happened recently when an employee had told him that Jesse and Cathy had a very heated discussion a few weeks or so ago and that Jesse had made the comment to Cathy that ‘she had better do it or else!” Don wasn’t only worried about his own safety but he was also concerned about possible ramifications to his family and other employees.

A few moments later, he got a call on his office phone from Rick Malin, a close friend who was a VP at his local bank. Yesterday, Rick had been in two different bank branches and noticed the same individual had cashed two separate payroll checks, one at each of the branches. Rick thought that was very odd and asked to have copies of the checks sent to him for review. To his amazement, both checks were drawn on the Grills’ payroll account but made payable to two different individuals. In following proper bank procedure, the tellers verified the ID’s that were presented with the checks. One check was made payable to Jeff Hankins and the second one was payable to Jesse Hawkins. Don then asked Rick to describe the individual he had seen cashing the checks. Rick gave a description that left Don with no doubt that it was Jesse.

Don thought how could his Scheduler cash two paychecks with different ID’s? Also, since he signed all the checks, he was absolutely sure he would either notice a duplicate check or two checks that were very similar to each other. Don then asked Rick, “Who signed the checks (the maker)?” Rick told him that Don had signed both of them. Now Don was really confused. Next, Don asked when the checks were dated; Rick told him they were dated for the pay-period that included Harvest Days. Don remembered that when Cathy brought him the checks, he was very busy with some personal matters and he did not review the attached documents, something he normally did. He just signed them and gave them back to Cathy for disbursement. At the time though, he had a feeling that there were more checks than expected, but since there were a lot of checks already because of Harvest Days, he didn’t bother to count them or ask Cathy. Rick then said that he had called Cathy about an hour ago about the same issue. He said she suddenly got very distant and told him that he had called at a bad time and asked she asked him if she could call him back.

Don thanked Rick for the heads-up and decided that he needed to speak with Cathy. When he went looking for her, one of the staff told him that she received a call about an hour ago. After the call, she went to the alcohol storage closet, and then left if a hurry without saying anything to anyone. Don tried to call Cathy’s cell phone, but he only got voice-mail.

Don began to wonder what to do next.

Exhibit 1

The No-Name Grill

Don Kirby

Owner & GM

Bruce SamsonCathy Werner

Operations Mgr.Office Manager

Jesse Hawkins

Scheduler

Kevin Anderson

Floor Supervisor

Kitchen Staff BartendersSecurity

& Bus persons& Servers