Fraud Investigation Paper

Investigation 6

Fraud Investigation Paper

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Fraud Investigation Paper

The investigation of allegations against a plant employee of an acquired corporation, Lakes Inc has resulted in the discovery of falsely submitted expense claims. The investigation began after an anonymous tip was sent to officials in the company. The tip was received by the company on June 12, 2007. The tip stated the purchase for a computer server was fraudulent and a television had actually been purchased in its place. Upon further investigation, the company discovered there was no new computer server bought and in fact the purchase had been for a high definition television. The company hired an investigator and began to search for the culprit of this known fraud.

It is important for companies to have protection in place to protect against acts of theft or fraud. It is estimated that one third of employees will commit an act of fraud against their place of employment (Wells, 2001). Smaller companies are more directly affected by these acts. Responding to these demands requires the auditor to have a thorough understanding of the misappropriation of the assets and fraudulent disbursement schemes.

Although "internal theft" and "employee fraud" are commonly used, a more encompassing term is "asset misappropriation"(Wells, 2001). Asset misappropriation occurs when an employee uses company supplies or equipment to commit acts of fraud or for personal usage. Fraudulent disbursement schemes are any ploy that is used to steal or misuse the assets of the organization. The assets can be stolen in the form of cash, falsifying expense claims, and stealing inventory. Disbursement fraud is crimes were an employee manipulates receipts in order to have the company pay for a personal item for the employee.

In the case of the fraud being committed at Lakes Inc, the investigator began the investigation in August of 2007 and the investigation was completed by November of 2009. During this time the investigator discovered the purchasing officer, Bob Smith, and his administrative assistant, Mary Bad, had developed a scheme to create false invoices that were masked as company purchases but were in fact personal items purchased for the purchasing agent and their assistant. The scheme involved purchasing the item with a company credit card and then creating a false invoice for the purchase and discarding the original copy. Once the investigator made these discoveries he contacted the vendor, Sterns, and verified that the invoice number on the file copy matched on the invoice they had for the sale of a high definition television.

The investigator examined the physical assets database. Lakes, Inc. maintains a physical asset database in which all non-disposable items with a purchase price of $1,000 or more are recorded. Each item is assigned a unique ID number and barcode label, which are used to track the item. The database is maintained by the administrative assistant. The investigator did not find a record of the purchase of the computer server in the database and an id number had not been assigned to this particular type of office equipment.

The investigators next step was to do a face to face interview with the manager of the vendor, Stern. Stern was a trusted vendor who had been an approved by the company since May of 2005. The manager of Stern, Ted Jones, advised the investigator of the suspicious behavior of Bob Smith over the last six months. He claimed Smith had made several orders over the last six months that he insisted only be picked up by himself or his assistant, Mary Bad. Of the five fraudulent acts, two were committed by Smith and three additional purchases were made by Bad. Ms. Bad had used the purchase card assigned to Bob Smith to make these additional purchases.

After reviewing the records of the vendor, the investigator discovered five additional purchases that were made by Smith or his assistant before August of 2007. Mr. Jones provided the investigator with copies of the five invoices which contained purchases for a notebook computer, a digital camera, a digital camcorder, a GPS system, and a home theater system. The investigator took the invoices and matched them to the physical assets database and discovered there were only copies of the purchases and no original copy or assigned ID number. All of the purchases were purchased with Smith purchasing card and approved by the purchasing agent. Mr. Smith and Ms. Bad were fired.

The scheme involved the two employees creating false invoices that appeared to be for company purchases but where in fact for personal items for the two offenders. The company purchases were designed to cover up the misappropriation of company assets. Smith and Bad worked together to cover up their fraudulent scheme and used company equipment to commit the frauds. They manipulated the invoices and the information being entered into the physical assets database.

Asset misappropriation makes up about eight out of ten of the occupational frauds that occur in organizations (Coenen, 2008). Most asset misappropriations are fairly straightforward and can be recognized by accountants with proper training. According to the Association of Certified Fraud Examiners, more than 91% of all internal fraud schemes involved an asset misappropriation element, and the median loss from an asset misappropriation was $150,000 (Coenen, 2008). This crime is defined as a white collar crime and is extremely common in companies and organizations.

The investigation determined that $8,795.60 in false invoices had been submitted for reimbursement through the purchasing department. The offenders should be punished for their crimes and face criminal consequences. The two criminal offenders should be charged with fraud and the attempt to commit fraud. The large dollar amount of the crime would make it a felony and under federal statutes the offenders would face six to ten years for their first offense and eight to fourteen years for the second offense (Berman, 2010).

The company, Lakes Inc, should make an example of the two employees that committed asset misappropriation acts against the company. These acts cause great financial harm to the company and affect the attitude of the organization. Bob Smith used his position of authority in the company to commit acts of fraud and encouraged an employee to engage in these acts with him. The company should have a better system of controls and develop better predictive measures for stopping acts of theft. Employees should be trained to recognize acts of fraud and to report these acts to the company. By reporting and pressing charges against the purchasing agent and his assistance, the company has shown current and future employees they will not tolerate act of theft.

References

Berman, D. (2010). Sentencing Law and Policy. Retrieved October 24, 2010 from

http://sentencing.typepad.com/sentencing_law_and_policy/federal_sentencing_guidelines/

Coenen, T. (2008). Asset Misappropriation. Retrieved October 24, 2010 from

http://www.fraudessentials.com/index.php?option=com_content

Wells, J. (2001). Enemies Within: Asset Misappropriation Comes in Many Forms. (The Fraud

Beat). Journal of Accountancy. P. 2-5. Retrieved October 24, 2010 from

http://www.allbusiness.com/human-resources/workplace-health-safety/828482-1.html