Question

Gerard grew up in Virginia. One of his colleagues remembers that Gerard was known in school, skilled at his schoolwork and that he liked to play soccer and listen to Opera. The friend also remembers that Gerard’s family was a modest one that can barely satisfy its needs while Gerard was not happy with this type of living. Gerard graduated with an accounting degree from a good college in 1996. He enjoyed the inward mechanisms of accounting systems, and in 2000 he found himself part of Delta Company after his employer, Pioneer manufacturing, was acquired for more than $10 billion. Gerard had an influential role in adopting enterprise resource planning system that replaced the old one in while he was employed at Delta Company. A mistake by his new employer, Pioneer Manufacturing created an opportunity for Gerard to steal company funds.

As a part of the changeover team, Gerard became experienced in all aspects of ERP accounting modules including accounts receivables, accounts payable, fixed assets, financial reporting, journal entries, checks and wire payment processing. I was granted by mistake an authorization to sign and approve checks, along with a co-worker, up to $300,000. I discovered this permission quite by accident some two years after the takeover.

Our accounting department consisted of a manager, assistant manager, accounting controller, and three people whom I supervise. Together with a fellow worker and an associate, I was among those authorized employees who can request checks. The fellow- worker and I also could approve checks. In the accounting department, we shared our passwords with each other so we can finalize the work without any delay in case someone was out of office and the task had to be done immediately. One day, while I was drinking my coffee and thinking, I realized that I can access to one of my colleagues’ account to request a check and I can then log into my credentials and approve my own request. I went to work every day for the next year tempted by the pot of gold that was there for the taking.

In June 2003, my spouse was pregnant and my yearly eighty thousand dollars salary was not covering my due bills and college loans. I thought that in case I fairly paid off my obligations, at that point we might do very well with my salary coordinating our living costs. I tried my scheme by paying the current due on one of my credit cards that had a title that included the word “Universal.” Before I left my office late, I logged on as fellow worker and asked for check issuance in the amount of $1,200 to Universal. This check looked typical since we did a lot of transactions with a company that includes the word “Universal” in its title. After the check was issued, I sent it with my statement of account to my credit card company, and the company credited my account in the amount of $1,200. After some time, I felt guilty and worried because if I were caught, I would lose my job for stealing $1,200. After one week, I continued repeating the same embezzlement process while changing the amounts till I had settled the whole amount of ninety-five thousand dollars due on my credit card. After my credit card settlement, I was free and clear of all debt, except for the mortgage on our house.

I noticed that one of my checks for $5,555 had apparently gone missing just before I’d cleared all the charges to the Universal card; it wasn’t posted against my credit card account, and it had not cleared the company’s bank account. I was stressed that something had caused the bank not to prepare the check or that my extortion had been discovered. For a couple of weeks, I anxiously looked at my emails each morning checking the subject lines for words like “explanation requested.” Each time the phone rang I expected that I would be called for a meeting. At that point at around 10 on a hot late-August morning, I received a mail envelope from our accounts payable department in Chicago. There was the check I had overlooked to put my individual credit card number on the check, and so the card payment processors didn’t know whose account to credit. The accounts payable department sent it back to me since they did not know the purpose and the nature of this check.

In the middle of cold winter, the impacts of the panic had worn off, and I began considering around how simple it was to get that $95,000 “bonus. I am thinking of repeating again the fraud although I was not really in need of that money as was the case before. I remembered the missing check scare, and so I now wanted a scheme that bypassed mailing the checks to my credit card company. I registered “Sigma Enterprise” with our secretary of state, got a federal ID number, and opened a bank account at a major bank with lots of branches in Chicago. I chose Sigma because our company did a lot of business with another company that had Sigma in its name. On a Wednesday afternoon, right before I left for the day, I logged on as associate and requested a check made out for $35,250. I then logged on as myself and approved it. I picked up the check on Thursday and deposited it in Sigma’s bank account on Saturday morning. The teller treated the transaction like any other routine transaction and handed me the deposit receipt showing that the whole $35,250 was available. Using this method, I stole about $2.1 million in 2004, $1.9 million in 2005, $3.4 million in 2006, and $0.9 million in 2007.

Getting a check was easy because I logged on as fellow worker or associate and requested a check and then I approved the check. The checks were printed overnight, and it was associate’s job to collect the physical checks every day from the company building next door. I had to make sure that associate had the day off the next day because, when associate was away, I was the person who collected the checks. At my desk I would remove the Sigma check from the batch, and all the other checks were mailed off to where they were supposed to go. Normally, I would just wait for associate to take the day off, and I’d request a Sigma check the day before. If I needed money urgently, I’d give associate the day off so that I could collect the checks.

For every credit, there has to be a debit, and my debits needed to be hidden somewhere. Our payments were usually for purchases, sales commission expenses, miscellaneous expenses, or an administrative expense. In 2003 and 2004, I hid all the debits in ledger accounts that had a lot of reconciliation activity, making sure that my debit helped the account reconcile to zero. One of my accounting tasks was to record the investment income of our Australian investments in U.S. dollars (USD) in our U.S. accounting records. I was supposed to use the average Australian-dollar-to-USD exchange rate to record the interest income. From 2005 to 2007, I would calculate the real exchange rate, and then I would purposely weaken the Australian dollar by a few basis points to understate the USD value of that income. I was the only person who worked on this task for seven years, and because the accounting system had thousands of journal entries and billions of dollars of transactions, my Sigma checks remained hidden.

Every Sigma check was deposited in my account, and I have to find some explanations and excuses to spend my money without making my spouse and colleagues suspicious. In the beginning, I told my friends and wife that I have a side business where I have many clients and good source of money; at that time, all was convinced because my lifestyle was normal. However, when my lifestyle changed to the ownership of unique luxury cars, travel trips to different cities on business class, I told people that I was a gambler at Vegas and brought with me proofs that I really gambled. The gambling story did not work with my wife especially that my wealth jumped to three million dollars in less than two years. So, I knew that I had to choose either my wife or continue my fraudulent activities. I chose to insulate her from all the acts I committed and I did not want to engage her with any of my dirty actions, so I divorced her.

By mid-2007, my extortion had cooled off, and I’d as it was taken $1 million so distant that year. An internal audit found that 3 of us in the accounting department had an authorization to approve checks and we were given internal forms that we had to fill them. One morning, the fellow worker and I were discussing this matter with our boss and we all agreed that we must not have approval checks authority since we are much involved in the accounting function. We actually revoked our own check approval authority.

My ex-wife and the fellow worker became friends and she informed him that she was not convinced of the gambling story which raised the suspicion of the fellow worker. The fellow worker went immediately to the office and ran a query about the whole list of 2007 checks that she had approved or requested. She found the Sigma checks which amounted to 0.9 million dollars. On Friday, I was called for a meeting which did not went well and after two days I was arrested by fraud investigators and I told them that I wanted to talk with my attorney

Required:

Answer the following questions:

1. What anti-fraud policies would have Delta Company adopt to prevent such fraudulent activities?

2. Based on your analysis of the case, why the accounting information system controls are important?

3. What are the fraudulent behaviors encountered in the case, and what are the mitigating controls that can be implemented to avoid such fraudulent activities?

4.        Suppose that you were assigned to conduct an integrated audit for Delta Company., what are the high-risk areas that you may identify?

Answer 1

1. Anti fraud policies are the policies that is framed to safeguard the financial viability of the company, reputation of the company , prevention of Occurance of fraud, prevention of concealment of material facts. To protect the fraudulent activities , the Delta company should adopt following measure  

• Implementation of internal control system
• Segregation of duties
• Implementation of continuous audit system by audit Committee
• Critical activities should be identified where there is chances of high risk and fraud .
• Checking the credibility of personnel after certain period
• Review the work done by responsible person.

1. Accounting information system is computerised system which helps in collecting, storing, recording of information entered in the system . Accounting information system provides analysis of data, detailed report to the management . The importances of accounting information system control are ,

• Leads to reduction of errors
• Provides valid and accurate information to the top management.
• Reduces the chances of fraud.
• Provides timely information.
• Make person accountable
• Identify critical areas were likely to have high risk of fraud
• Increases credibility of financial information
• Increases credibility of financial statements.
• Accessibility to authorized person.

1. In this case Fraudulent behavior encountered is embelezzment of fund of the company and misuse of authorization power awarded by company . The mitigating control adopted by the company to avoid fraudulent behavior is to implement continuous audit of the system, implement the strict internal controls measure , review work done., review authorization polices implemented, review credibility of authorized personnel.
2. The high risk area that may be identified while conducting audit are

• Approvals of payment of funds
• Authorization procedure of company
• Personnel who have direct access to accounts
• Internal controls placed on accounts receivable and accounts payable
• Person who have access to accounts receivable and accounts payable accounts
• Records that can easily be manipulated