Question

In his own words, Daniel Jones was “The Dude.” With his waist-long dreadlocks, part-time rock band, and well-paid job managing a company’s online search directory—he seemed to have it all. Originally from Germany, Jones, now age 32, earned his doctorate and taught at the University of Munich before coming to the United States, where he started his career in computers. When Jones started working with the company as a director of operations for U.S.-Speech Engineering Service and Retrieval Technology—he was assigned to work on a new, closely guarded search engine tied to the company’s .net concept.

The company allows employees to order an unlimited amount of software and hardware, at no cost, for business purposes. In one year’s time, Jones ordered or used his assistant and other employees (including a high school intern) to order nearly 1,700 pieces of software which had very low cost but were worth a lot on the street. He then resold them for reduced prices— reaping millions. When items with a cost of goods sold of more than $1,000 are ordered, an e-mail is sent to the employee’s direct supervisor, who must click on an “Approve” button before the order is filled. In no individual order was the cost of goods more than $1,000—he made sure none of the orders required a supervisor’s approval. The loosely controlled internal ordering system reflects the trust the company puts in its employees.

During this time frame, FBI agents said they saw Jones exchanging a large box of software for cash in a department store parking lot. The FBI contacted the company’s security and began monitoring Jones’s bank accounts. Previously, one account with his bank had an average balance of $2,159. In a short time, however, the average balance ballooned to $129,775. Another account at another bank showed irregular deposits totaling $500,000—none of which appeared to be from any legitimate income or other source.

Investigators also noted that Jones purchased a Ferrari, a Jaguar, and traded in lesser vehicles for a Hummer, a Mercedes, and a Harley-Davidson motorcycle. He also bought an $8,000 platinum diamond ring, a $2,230 wristwatch, and a $4,000 bracelet. “You figured that I like big boy’s toys by looking at some of my pictures,” Jones wrote on his personal Web page. “I just can’t resist.” The Dude’s Web page includes a camera for monitoring his cat and photos of his yacht, cars, and other treasures. For a relatively low-level manager, it was an impressive collection. But at his company, where teenage software engineers can earn more than company directors, no one noticed anything unusual.

A neighbor across the street from Jones said that he was clearly wealthy, but not flamboyant with his money. He described Jones as an intelligent man who didn’t flaunt his education, would loan neighbors tools, and was always friendly. The neighbor was surprised to hear the accusations against someone he called his friend. All he knew about Jones was that he was a good neighbor who loved cars. “He was very, very helpful. The few times I had problems with my PC, he’d come and help straighten them out,” the neighbor said. “They are just ideal neighbors. I feel terrible for him and his wife.” Jones and his wife lived in a modest home.

Jones also joined the city’s Rotary Club, “where he seemed more outgoing and personable than the stereotype techie,” said a local jeweler and immediate past president of the club. “He seemed like what I would expect a genius software developer to be.” Eventually, the fraud was discovered and Jones was fired. He was also charged with 15 counts of wire, mail, and computer fraud—with each count carrying a maximum of fives years in prison. He is expected to remain in custody until his preliminary hearing.

Questions:

1. Describe the symptoms of fraud that might be evident to a fellow employee.

2. Recently, his employer has been putting more empha- sis on controlling costs. With the slowing of overall technology spending, executives have ordered managers to closely monitor expenses and have given vice presidents greater responsibility for balance sheets. What positive or negative consequences might this pose to the company in future fraud prevention?

3. As discussed previously, all frauds involve the following key elements: perceived pressure, perceived opportunity, and rationalization. Describe two of the key elements of the Jones fraud— pressure and opportunity.

4. From the scenario, what measures has the company taken to prevent fraud? In what ways could the company improve?

Answer 1

1.The following could be symptoms of fraud:

a.Posh Lifestyle: Daniel Jones drove expensive vehicles. It is clear from his site that Jones enjoyed telling people about his toys. It is likely he showed or talked about his various cars to his fellow employees. A clue to Jones’s fraud is that he began to purchase most of these expensive cars in the last ten months of the fraud, not over the period of time he worked for his company.

b.Analytics: Jones received large amounts of software free of charge to be used on developmental projects. Someone should have discovered that Jones was receiving larger quantities of materials than his colleagues. His company could also require seeing the projects Jones was working on and the reasons why he needed such large amounts of materials.

c.Internal Control deficiency: His company had no internal control checks for amounts under $1,000.

d.Unusual Behaviors: It is not one particular behavior that signals fraud but rather a change in entire behavior. Jones had worked for the company long enough that employees and coworkers would be able to tell if he was experiencing behavioral changes.

2.a.Positive Consequences: Because managers are encouraged to have tighter control over costs, their scrutiny may prevent potential fraud perpetrators. Also, managers will take more ownership of their department because they will be in charge of a greater portion of the assets and will likely be more careful with expenses, especially if a bonus is given for keeping costs low.

b.Negative Consequences: Managers may be more tempted to commit financial statement fraud, especially if a bonus is attributed to keeping costs low/revenues high. Controls will need to be in place as a preventive measures. other non quantitative measures should be looked upn rather than monetary benefits

3.a.Pressure: Fraud pressures can be divided into four types: financial pressures, vices, work-related pressures, and other pressures. His desire for luxuries was enough to motivate him to commit fraud.

b.Opportunity: His company had a weakness in its controls. It required approval only for software or hardware of more than $1,000. Jones had ordered software in the past for legitimate purposes. He saw that no one really checked up on him, since he was director of a very secret project.

c.Rationalization: He rationalized his unethical acts in one way or another.

4.It appears that his company tries very hard to create a culture of honesty, openness, and assistance by focusing on hiring honest people. However, his company could benefit from developing a code of ethics. In this situation, there was no overriding of existing controls; rather there were no internal controls in place on purchases of less than $1,000. His company could benefit from having some type of internal control to prevent this type of fraud from occurring in the future. A whitsleblower mechanism should be in place where when the upper management is at fault external agencies can be contancted for prevention of fraud