ACCT 317 Assignment Forensic Report SEM201 Complete [PDF]

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ASSIGNME



ACCT 317 – FORENSIC ACCOUNTING



Submissio Academic Integrity FOR INSTRUCTOR USE: CLO/PLO n: TABLE Plagiarism Sunday CLO-PLO Q.No. Max Max The practice of taking someone else's work or ideas andMark passing themScored off as one's own. An Day:



example of plagiarism is to use creative works of another, without appropriate acknowledgment of 10 the author or source. Collusion CLO 4- AS 3 1 29 November Secret or illegal cooperation in order to deceive others. Collusion is the presentation of an Date: 2020 2 result in whole 10 or in part of unauthorized assignment as one's ownCLO which5is AS3 in fact the collaboration with other person(s). Collusion involves the cooperation of two or more 6- forms AS 3of3 academic misconduct. 50 individuals or other Time: 2:00 PM in plagiarismCLO



CLO 6- cheating. IT3 4 Disciplinary 20action will be taken against students Both plagiarism and collusion constitute Teacher: Salma Baabbad who engage in plagiarism and collusion. TOTAL 90.00 Student Declaration I have read and understood the statement of academic integrity written above. I certify that the attached work is entirely my own except where work quoted is duly acknowledged in the text; that I Studenthave not worked with another person or persons except where specifically permitted by the teacher, NAME and that this work has not been submitted for assessment by myself or any other person in any other &ID time. I have retained a copy of my work. Student ID 1. Section: 2.



Student Name



1



Teacher: SALMA BAABBAD 3. 4. 5.



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Signature



Forensic Accounting Case Study Series – sponsored by Deloitte FAS LLP and the Deloitte Foundation Bags Medical Device Company Case No. 2-1 Copyright © 2014 Deloitte Development LLC. All rights reserved. Objective: Given that first year associates are required to exhibit a certain level of analytical skills, the case has been developed to test the students' analytical skills and ability to use Microsoft excel to analyze patterns and draw relationships Company Overview: Bags Medical Device Company ("BMDC" or "the Company"), based in Arlington, Virginia, sells medical devices to hospitals and doctors in private practices across the United States. BMDC was founded in 1998 by Steve Flanders who began selling the devices from his garage. The Case: The company was hit hard by the recession and sales have been down the past couple of years but analysts have high hopes and have projected an 8% earnings growth this fiscal year. Based on the call from the whistleblower hotline there is an alleged collusion amongst sales, legal and accounting to list additional sales members as secondary sales representatives on contract sales to allow for unmerited commission payments. The Whistleblower identified 5 individuals who he believes is involved: 1. Mitchel Bogart – Sales Rep 2. Carly McFinnigan – Accounting Clerk 3. Amanda Smith – Sales Rep 4. Willie Johnson – Sales Rep 5. Barry McMillan – Contracting Manager



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You are working as forensic accountant in a consulting firm, Rango Fraud Specialists, LLP. You meet the CEO of the company to investigate the issue. Informational Interview with the CEO Steve Flanders: Question: How was the issue identified by the client? CEO Answer: The issue was identified from an anonymous call into the whistleblower hotline on 1/12/12. Question: Are there any further details regarding the allegation that has been provided to BMDC? CEO Answer: Based on the call from the whistleblower hotline there is an alleged collusion amongst sales, legal and accounting to list additional sales members as secondary sales representatives on contract sales to allow for unmerited commission payments. Question: What are the sales commissions related to? CEO Answer The sales commissions are related to a BMDC proprietary product. Question: Can you explain the sales commission process? CEO Answer The sales commissions process is: 1. Sales reps are responsible for meeting with the customers and collecting sales orders after an initial contract is established. 2. For a contract to be established, a manager from the contracting department must approve the terms and conditions of the contract (price, discounts, rebates, etc.) Each contract lists the sales rep that is the primary company representative (receives 10% of the contract price). The contract also allows for a secondary sales rep (receives 5% of the contract price); this is someone who would have assisted in the sales process. 3. Once it's been approved, each contract is entered into the accounting system where the commissions are automatically calculated.



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This process is overseen by the accounting department. The accounting clerk is responsible for reconciling commissions paid to contract price. Once the information is reconciled and entered into the system, the contracting manager then reviews the contract entry and confirms that information was entered properly. It is not the responsibility of the accounting clerk to confirm that the salesmen are appropriately listed on the contract. Question: Other Information that you would like to share with us? CEO Answer: 1- Our group of 15 salesmen works really well together and they are all very friendly with one another. The exception is one individual who the CEO has told us is his star salesman. This person consistently is in the top 3 every year for commissions. While the individual occasionally collaborates as a secondary to other salesman's efforts, he refuses to use secondary salesman on his primary sales. 2- Mr. Flanders admitted that he puts a considerable amount of pressure on the sales force to meet and exceed established quotas. End of CEO interview __________________________________________________________________________ The company has already interviewed various BMDC employees including the five (5) individuals identified by the whistleblower to gather information (see below). Some of the information is purely speculative. Bear in mind that some of it came from the interview with Susie Sanders, who is known to be the office gossip queen. Mitchel Bogart Background: Mitchel has been with BMDC for the last 7 years. He came on-board based on a recommendation from one of his former colleagues at another medical device company. He was known to have a lot of connections within some of distributors that handle BMDC' products. He started off slowly in his first two years at BMDC due to a non-compete agreement with his former employer. In the beginning of his third year (2007) his sales started to climb and by the second half of the year he was beating out other sales reps. Personal History: Page 4 of 16



Mitchel grew up in an area that connected him with high level executives at medical device distributors. Most of his customers are old friends of his. There is a rumor going around the office that Mitchel likes to live above his means since he just bought a brand new Porche. __________________________________________________________________________ Carly McFinnagan Background: Carly has been an accounting clerk at BMDC for almost 7 years. She is currently in the same position that she was hired into. Her main responsibility is to calculate the commission payments to each of the sales reps. In addition, she is responsible for confirming that the classification of the sales reps as primary or secondary is appropriate based on the contract information filled out by the contract department. Carly has been up for promotion to accounting manager for the last 3 years and has been passed over each time. Based on her understanding, the company informed her that they have not been able to identify anyone who can fill her current position. Her belief is that the company can't find someone else to take this low paying job. Personal History: Carly has been married for the last 15 years and lives in an affluent area near her job with her 3 boys. Her husband is a big time investment banker. Related Character(s): Barry – Carly has been Barry's neighbor for the last five years. Barry and her husband have become good friends over the years. _________________________________________________________________________ Amanda Smith Background: Amanda has been with BMDC for the last 6 years. She started as a sales rep and has held the same position since then. Amanda was a top 5 salesperson in her first four years, but during the last two years, she has been in the bottom 5 in sales. Because she set the bar so high initially, management increased her sales quota. But during the last two years she has missed her sales quota and fears that if things don't change soon she could be out of a job. Personal History: Amanda is divorced and supports her two children along with her niece who has just moved in with her. Page 5 of 16



Related Character(s): Barry McMillian – Longtime friend of Amanda's since they attended the same college together. __________________________________________________________________________ Willie Johnson Background: Willie has been with BMDC for 4 years. Previously, Willie worked for one of the leading pharmaceutical firms and worked in their sales department for 10 years. Because of his experience in sales, Willie has had an easy time meeting his quotas since he joined BMDC. Personal History: Willie's personal life is in disarray as he is going through his second divorce and it is rumored that he has a severe gambling problem. __________________________________________________________________________ Barry McMillian Background: Barry has been with BMDC for about 8 years now. He started off in sales and has since moved into the contracting department. His role is to make sure the terms of the contract are within the company's pre-established limits and that all of the relevant information (client name, price, discounts, rebates) are properly listed. In addition, he inputs the sales representative names on each contract and classifies each representative accordingly as the primary or secondary. Personal History: Barry is happily married for 10 years and has 3 loving kids. He lives in a very affluent area near the office. Related Character(s): Amanda Smith – Longtime friend of Barry's since they attended the same college together. Bradley McFinnagan – Barry's next door neighbor for the last 5 years and they have since become very good friends. Bradley is married to Carly McFinnagan. Page 6 of 16



__________________________________________________________________________



Requirement: 1. In The Excel File "Sales Commission Data", complete the calculation of the following (20 Points): i. Primary, Secondary and Total Commissions for each contract (columns G, H, and I of tab ".1 Contracts by Year"). ii. Calculate the commissions paid by year for each individual in the ".2 Commissions Paid" tab. iii. Complete a count of the number of contracts by individual by year in the ".3 Total Contracts by Ind." Tab. 2. Based on your analysis of case data and information provided, write a report that answers the following questions: i.



Describe how the fraud was perpetuated and by whom?



ii.



Quantify the amount lost by the company by the fraud occurring?



iii.



Provide recommendations to BMDC to prevent this fraud from occurring in the future?



Report Format: Use the report templet below. Font Style (Arial), Font Size (12), and Line Spacing (1 1.5). 3. Submit a hard copy and soft copy of the excel file and the report.



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Executive Summary: The fraud examination commenced when Steve Flanders, CEO of the company, received a call from the whistleblower hotline for an alleged fraud involving collusion amongst the sales, legal, and accounting department. The parties mentioned were involved in an embezzlement ring where they colluded to overstate the commission payments to some sales representatives. This report intends to ascertain whether the fraud actually happened, whether the parties mentioned were even involved in the fraud, and identify the schemes they employed in committing the fraud. The report will also mention the investigation results and bring to light the kind of fraud committed and any weaknesses or flaws in the system that encouraged the perpetrators, including the recommendations to be adopted to prevent a similar fraud from occurring again. The accountant involved in writing this report is Rango Fraud Specialists, LLP. The Findings - The investigation results: Based on the interviews conducted, documents reviewed, and information gathered during the fraud investigation process, my analysis indicated that indeed, there was a fraud that was committed by the mentioned parties. The following is a summary of the evidence and information in support of the fraud analysis findings: Red flags uncovered: 



A dramatic lifestyle change – One of the suspected employee Mitchel Bogart is living beyond his means. This was proven by the fact that he purchased a brand new porche car that generally cost an arm and a leg, which is obviously more than his paycheck allows.







Gambling habits and personal issues – One of the mentioned employees in the fraud, Willie Johnson, is currently undergoing a second divorce and has a severe gambling problem. Due to Page 8 of 16



divorce issues and the addictive nature of gambling, the employee's income may be inadequate to finance his gambling activities, and divorce payments and hence may feel coerced to do anything to earn extra income. The same motivation for fraud can be seen in Amanda Smith, who is also divorced and has two children and a niece to support. This may signify engagement in fraudulent activities such as embezzlement and making extraordinary claims. 



Disgruntled employee – This is a characteristic of an employee who does not feel comfortable at work. One of the mentioned employees, Amanda Smith, is undergoing work pressures such as poor performance and job insecurity. This may make the employee feel external pressure to commit fraud.







Close associations between some employees – When an employee has a uniquely close relationship with others, this may allow the opportunity for the employee and others to collude and commit fraud. The fact that all secondary sales under Mitchel Bogart's primary contracts are assigned to the only employee Amanda Smith is quite suspicious, considering the fact that Mitchel Bogart doesn't like using secondary salespeople on his primary sales.







Accounting discrepancies – This is where some sales commission payments amounts differ from those stated in the income statement. These discrepancies signify that there was a fraud being committed as indicated below: Sales commissions Commissions



Year 2008



Year 2010



indicated on the



847,539.60



553,952.65



income statement Commissions paid Differences



829,704.10 17,835.50



543,454.95 10,497.70



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



Lack of separation of duties – When an employee handles multiple tasks, the employee can always take advantage of the situation to commit fraud, especially where there are no checks and balances. This can be seen with Carly McFinnagan, the accounting clerk for seven years carrying out multiple accounts department tasks. The same can be said of Barry McMillian, who performs all the contracting department's significant tasks.







Possessive attitude – This is where an employee acts possessively towards their work area and tasks handled. Carly McFinnagan seems to think that nobody else can take up her low-paying job and that she is unreplaceable; hence she cannot be promoted. This can make her think highly of herself and use this opportunity to commit fraud.



How was the fraud perpetrated, and by whom? It is evident that the fraud must have been perpetrated by a group of employees who colluded to defraud the company. Following my investigations and review of the case, the fraud was committed by the five individuals mentioned since the red flags point to them, making them the most prominent suspects. The five individuals involved in this fraud are Mitchel Bogart, Carly McFinnigan, Amanda Smith, Willie Johnson, and Barry McMillan. Due to a lack of segregation of duties and internal controls for checks and balances, the contracting manager Barry McMillan who was in charge of approving and listing contracts according to the sales rep, liaised with the sales rep to list additional sales members as secondary sales representatives. Mitchel Bogart, the main culprit, listed Amanda Smith as the secondary sales rep for all his primary sales contracts. The role of Carly McFinnagan, the accounting clerk, was to cover up the fraud by balancing the figures since she is the one who is in charge of reconciling the commissions paid to contract price. Since she was also responsible for calculating the commissions and confirming whether the appropriate classifications have been done as per the contract details, it was easy for her to manipulate the figures and adjust the classifications as agreed by their inner circle. Due to the



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problems that Willie Johnson had, he had to collaborate with them to make the fraud successful. After that, the proceeds from the fraud were shared between the five of them. The amount lost by the company from the fraud: The total amount of money lost from the fraud includes commission payment figures overstated in the income statement totaling $28,333.20 for the years 2008 and 2011 and $53,409.60 in unmerited commission payments. These are correctly explained in the tables below: Table 1: Overstated commission payments Total sales



Year 2008



Year 2010



Totals



commissions Commissions indicated on income statement Total commissions paid Difference



847,539.60 829,704.10 17,835.50



553,952.65 543,454.95 10,497.70



1,401,492.25 1,373,159.05 28,333.20



Table 2: Unmerited commission payments Total contract sales



Primary commission



Total unmerited



Year 2008 - 2011



payments to Mitchel



commission payments



Bogart (10%) 258,981.50



to Amanda Smith (5%) 53,409.60



2,589,815.00



The Existing Fraud Elements: I believe that the mentioned employees colluded to commit fraud, and the perceived opportunities, motivations, and rationalizations that existed are explained below. Perceived opportunities: 



Poor or lack of segregation of duties – This is shown by the fact that Carly McFinnagan was in charge of calculating the commission payments to every sales rep, confirming the sales rep classifications as either primary or secondary, and reconciling the commissions paid to contract price. The same can be said of Barry McMillian, who was in charge of setting the contract terms, reviewing the relevant information inputted on the contract, classifying each of the sales rep Page 11 of 16



correctly as either primary or secondary, and reviewing the contract information entries in the system. This allowed them to manipulate the sales commissions records and adding additional secondary sales reps to receive unmerited commission payments. 



Inadequate internal controls – This is where there were no proper procedures and policies implemented to detect and prevent irregularities from occurring and ensure accounting and financial information integrity. This includes a lack of supervision and poor documentation processes, which give rise to opportunities for fraud. This allowed the said employees to falsify contract sales and commission figures without being detected.







Lack of audit trail – This is the lack of documentary evidence of the sequence of activities occurring at any specific time. Therefore, there was no ability to trace individual transactions from source to completion and vice versa. This permitted them to conceal any documents related to sales commission payments due to a lack of audits.



Perceived motivations: 



Pressure from management – The need to meet or exceed the expectations of meeting the management's sales targets may cause the employees to commit fraud to achieve the objective required. The CEO, Mr. Flanders, admitted to putting considerable pressure on the sales team to meet and exceed established quotas.







Personal incentives – This includes financial pressures and wanting to earn more money to maintain a high lifestyle and manage gambling problems. Some of the employees that is Amanda Smith and Willie Johnson have personal issues such as divorce and gambling addictions that require much money. Mitchel Bogart also lives beyond his means and therefore requires more money to sustain himself. These personal incentives may force them to commit fraud in order to have more funds to meet their pressured needs.



Rationalization: 



I am underpaid, and I deserve the extra money – This is where some of the employees may feel like they are not being paid what they really deserve and hence an intent to commit fraud to pay themselves. This is the case of Carly McFinnagan, who feels like her job is low paying, and nobody else wants it and hence the justification for committing fraud and compensating herself.







My family needs it to survive – This is where some employees may be undergoing family issues and hence commit fraud to support their families. This can be the case with Amanda



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Smith, who is divorced and supports two children and a niece. She may commit the fraud and justify herself that she is doing it for the family. 



There is no other solution – An employee may believe that they might lose everything, such as a job unless they commit fraud. This can be the case with Amanda Smith, who is currently underperforming, and she fears that she could be out of the job soon and hence the justification to steal in case of anything. The above mentioned perceived opportunities, motivations, and rationalizations resulted in a



group of employees listed in the fraud to collude and manipulate sales contracts and commission payments and, including adding additional secondary sales rep to receive unmerited commission payments. They covered up their tracks by falsifying the records relating to commission payments and contract lists. It was easy for them since they had a close relationship, and they were working in different departments without any supervision from other parties but only themselves. Limitations and Recommendations: Challenges faced during the investigation: The limitations faced during the investigation include the following listed below: 



Lack of access to other critical records with vital information that could have given more insights into the investigation process.







Lack of full cooperation from some employees during the interview process to providing in-depth information on the case.







Availability of too much gossip information that can be unreliable in the case assessment and hence the need for more verification.







Scope limitation hence not being able to collect sufficient and appropriate evidence to support the case.



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Further investigation is required to uncover more evidence to build a concrete opinion on the case at hand. Other measures and tasks that can be performed to get more information on the case include the following listed below: 



To carry out more interviews with other employees, especially in the accounts department and contracting department, to acquire as much information as possible.







To broaden the investigation's scope by covering other sections in the company such as payroll and H.R. department to get further evidence on the employees regarding the case.







To carry out more diligence background checks on the employees and their activities to establish the full extent of the case.







To get a list of all contracts issued for verification and examination in order to obtain more critical data with regards to the case.



Recommendations: The company should adopt the following recommendations to prevent fraud from occurring again in the future: 



Separation of duties – The company should implement the separation of responsibilities among the employees in order to increase accountability by not allowing a single employee to be in charge of multiple processes. This will eliminate any opportunity to commit fraud.







Incorporate robust internal controls - This will help mitigate the risk of fraud by adhering to the set processes and procedures to ensure financial information accuracy and authenticity. This includes employee supervision, follow-ups, and performing checks and balances. The availability of strong internal controls will discourage any attempt to



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commit fraud in the company, and employees will be more careful in performing their tasks. 



Conducting periodic audits – This helps to identify any weaknesses in the accounting processes and procedures, detect frauds, and preventing them. When employees know that audits are conducted frequently, this will deter them from attempting to commit any fraud for fear of being caught.



References



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Cendrowski, H., & Martin, J. (2015). The fraud triangle. The Handbook of Fraud Deterrence, 4146. https://doi.org/10.1002/9781119202165.ch5 Employee embezzlements. (2015). Fraud 101, 51-67. https://doi.org/10.1002/9781119198369.ch4 Employee theft and fraud. (2015). A Comprehensive Look at Fraud Identification and Prevention, 3457. https://doi.org/10.1201/b18429-6 Gottschalk, P. (2020). The privatization of fraud investigation: Internal investigations by fraud examiners. Huang, S. Y., Lin, C.-C., Chiu, A.-A., Yen, D. C., & SpringerLink (Online service). (2016). Fraud detection using fraud triangle risk factors. (Information systems frontiers.) Luell, J. (2010). Employee fraud detection under real world conditions. Padgett, S. (2015). Profiling the fraudster: Removing the mask to prevent and detect fraud. Spann, D. D. (2014). Fraud analytics: Strategies and methods for detection and prevention. Hoboken, N.J: John Wiley & Sons. Wells, J. T. (2011). Corporate fraud handbook: Prevention and detection. John Wiley & Sons. Youngblood, J. R. (2015). A comprehensive look at fraud identification and prevention. Boca Raton, FL: CRC Press.



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