Question

You are a, CFE, you were approached by at Al Huda and Supply Co. to conduct an investigation into possible fraud in the companies accounts receivable.

• Jamal a regular costumer had lunched several complainants about his account balance.

• Ali an accounts receivable employee has lost a big amount of funds due to the financial market crisis

• Maha an employee in the accounts receivable department although hard working was not promoted while others in the same positions received a promotion

• Jubran a clerk in the accounts receivable department lives beyond his means and recently purchased a BMW 780

• All employees have access to cash and records

• Maha is single mother with a son who is sick and need expensive medical care

You started to review the information you were given you discovered the flowing:

• There are several complaints regarding costumer balances

• Amounts of write offs are higher than normal in similar companies

Required

1. is there predication to start an investigation, Explain why

2. Apply the fraud investigation theory to the case

The following hints could be helpful

1. Documents you need

2. Fraud triangle

3. Interviewing order

Explain your steps in 2 above

3. What is your conclusion

   1. What is the fraud scheme if any

   2. Who do you thing committed it

   3. What is your advice to the company

Answer 1

Few instances in the above case are not normal and definitely raise questions:

• Jamal, a regular customer has complained about his incorrect account balance. This raises doubts on the manipulation in account balances.
• Ali, an Accounts Receivable employee lost huge funds in financial markets. This might relate in explaining how Ali will try and mke-up for the loss through unfair means.
• Jubran, a clerk has purchased BMW 780 which costs much more than his income. It's definitely questionable to identify the income sources of Jubran while his income from salary is much lower.
• Maha is the only employee in her department not getting promoted. This shows the unfair HR practices prevalent in Al Huda & Supply Co.

As per Fraud Investigation process, following four steps will be taken:

• engagement process
• evidence collection process
• reporting process
• loss recovery process

Engagement Process - In this process, a formal engagement will be initiated with Al Huda & Supply Co. to officially investigate the entire case for instances of fraud.

Evidence Collection Process - All evidences, oral & written, need to be collected for reconciliation and conclusion. In this case, we can cover following evidences

• Jamal's testimony with his bills, payment details, corresponding ledger & receivables balance in Al Huda & Supply Co.'s ledger.
• Maha's testimony and details of possible reasons why she was not getting promoted, who're the people involved in the Receivable department, their moduc operandi etc.
• Details of income sources of Ali, his losses and the amount repaid by him, if any, asset details.
• Details of income sources of Jubran, his payment details to buy a luxury car BMW 780 and his asset details.
• Balance Confirmation of all major customers and their reconciliation with the ledger balance in Al Huda's books for last one year, specially where high & abnormal discounts are offered.
• Details of all balance write-offs and their balance confirmations from customers, in case, any of them made the payment but it wasn't recorded.
• Audit trail of all the logs in the Accounting ERP to validate on the initial entries during invoicing, subsequent edits/corrections made and variances with customer's confirmations.
• Inventory based billing reconciliation to verify if all items taken out of inventory have been billed. It might be a case that certain Free of Cost Items (FoC) were issued for free and sold in grey market.

Reporting Process - Based on the above evidences, the employees doubtful of committing fraud will be cross-examined and will be forced to accept their crime or prepare for more severe punishment with reports filed against them. The complete report, alongwith evidences, process flow and loss detected will be submitted to the management for further action.

Loss Recovery - One of the most crucial step is to recover the above determined losses from the ones who committed it. It's quite likely that some of them like Ali, who'd suffered huge losses might not be able to pay upfront and will have to be dealt more severly while others might re-imburse the entire amount.

Fraud Triangle theory will also be investigated on the basis of pressure, opportunity and rationalization to commit fraud in the organization.

Interviewing order might be scheduled as follows:

• Management of Al Huda & Supply Co. for their understanding on the operations and people suspected
• Jamal's testimony as an outsider and complainant about ledger balance alteration
• Maha's testimony with regards to internal operations and her knowledge on the fraudulent activities performed
• Ali's testimony and proof of his asset, losses incurred & income details
• Jubran's testimony with his sources of income, asset details and remittance sources for BMW 780.
• Other employees of Accounts Receivable Department as per requirement.

The conclusion is that the employees of the Receivable Department had manipulated the ledger balances by reflecting higher discounts, write-offs and altered invoice details to siphon funds from the organization. These facts were covered by the Head of the Receivable Department and all of them were promoted except Maha who was too honest to be a part of their plans.

It was committed by a team and not just one person. They kept supporting and covering each other's tracksand that's why it was unidentified for so long.

Our suggestions to management are as follows:

• Keep an audit trail of all entries made in ledger.
• There should be limited visibility to team for customer balances.
• None of the team members should have access to alter or delete any entry.
• All discounts, henceforth, should be approved by the management of Al Huda & Supply Co.
• Customer accounts should be reconciled on a monthly basis to identify any variances and investigate the same.
• List of all inventory items should be reconciled with sales invoices to understand if any items were taken out without invoicing.