Question

Not-So-Fit-Bit is a high-tech company that designs, develops, manufacturers, markets, and services fitness-based wrist bands on a global basis together with software which can be integrated into any mobile phone so that a user can monitor their daily progress toward exercise goals. The Company introduced this innovative product two years ago, and presently has a substantial competitive lead in the market in both product innovation and price/performance. Their worldwide market share for this product currently stands at 85%. At the same time, revenues and net income have increased substantially over the past two years, resulting in a tremendous increase in the company’s stock price and a current Price/Earnings (PE) ratio, which is more than double the average PE ratio of New York Stock Exchange (NYSE) listed firms.

Paul Jones was recently appointed as the CFO of Not-So-Fit-Bit. Paul has worked in the high-tech industry for various firms in various financial capacities, including corporate controller, treasurer, and assistant CFO for 20 years as of the date of his CFO appointment. Paul took over the CFO role right after Not-So-Fit-Bit released record earnings for the fiscal year ended December 31, 2016 and after the company filed its Annual Report on Form 10K for that year. The CEO of Not-So-Fit-Bit, Nancy Fitness, requested a meeting together with Paul and other members of management including engineering, product development, manufacturing, marketing, sales, and service, a few weeks after Paul started as the CFO. In this meeting, Paul noticed that each member of the management team appeared to be totally stressed out, and the tension in the meeting room was high as soon as the meeting began. The meeting started with sales and marketing explaining to the management team that sales had slowed significantly in the first quarter. Engineering management updated everyone with news that Apple had announced a new wrist-band exercise monitoring product line and introduced it to the worldwide market with extensive fanfare two weeks ago, with both pricing and performance that exceeded Not-So-Fit-Bit’s main wrist band product line. Manufacturing reported that significant product quality issues were occurring, especially with the raw materials used in producing the main wrist band product line. The management meeting ended with very few positive comments by the members of the management team present at the meeting.

After the meeting Paul began walking back to his office when Nancy asked him to update the company’s quarterly and coming year’s projections of revenues and net income compared to budgeted levels. The company’s traditional accounting functions, IT, and Internal Audit departments, including the corporate controller report directly to Paul. He noticed that employees from each of these departments including the IT Director, Internal Audit Director, Corporate Controller and many members of their staffs, were working extremely large amounts of overtime and weekends. Paul met with each of these department heads to get an update on the status of the current quarter vs. budgeted revenues and expenses. Paul was led to believe that the company was on target to meet external revenue and profit expectations for the current quarter.

The first quarter ended March 31. The books were closed, and despite the information Paul heard just a few weeks earlier, the company indeed met the current quarter’s revenue and profit expectations.

Please provide an initial response to each question below; then, read your classmates’ responses and respond substantively to at least two of your classmates’ initial responses to each question. To make sure you cover the Requirements of this Discussion, I suggest you copy and paste each question below into your initial response:

Which elements (parts) of the fraud triangle can be applied to the situation occurring at Not-So-Fit-Bit? Be specific with specific details in your initial response.

Assume that Paul had access to the general ledger. What types of analysis could Paul have performed to determine if there was any type of financial statement fraud occurring at Not-So-Fit-Bit? Again, be specific.

Looking at the 2016 ACFE Fraud Report to the Nations and given the information in this case, what are some of the potential financial statement frauds that could be occurring at Not-So-Fit-Bit? Again, be specific, and address the potential involvement of IT, Internal Audit, and the Corporate Controller.

In your opinion, should the Internal Audit Department report to the CFO of this Company? If so, why? If not, to whom should the Internal Audit Department and the Internal Audit Director report to, and why? Be specific.

Answer 1

Fraud triangle involves 3 elements

1. Pressure - Pressure of any form may motivate fraudster.

2. Opportunity - Fraudster see an opportunity, which can solve his problem from the above pressure. He/she thinks cannot be found by anyone.

3. Rationalization - Fraudster do not view them as frudsters they think that because of circumstances they are being forced. They come up with excuses to justify their act.

In the given case Pressure is from market expectations, it being a listed company carries expectations from market and they are getting pressurised when delivering results if it is below par results.

and they have opportunity in the form of management of books through various means.

Rationalization may be in any form, may be because they feel that this slump is temporariy and they can revive the situation.

If Paul had access to general ledger he can access sales ledger and see if sales are even or if there is any kind of high volume of sales being recognised at the end of quarter or month.

He can also check if any kind of expense pertaining to current period is not recoreded in current period but recorded in subsequent period to increase profit in current period.

He can how provisioning is being done, he can compare provisioning with actual expense in subsequent period and see if any understatement of provisioning is there.

He can see how sales return are being accounted.

IT, Internal audit and the Corporate controller everyone reporting to CEO there is potential chance of fraud. They can manipulate data together. For example IT department can change the system to allow excess recognition of revenue by controllership team aand internal audit may overlook the matter.

Internal audit team should have independence. Internal audit shall report to independent Internal audit committee not CFO.If internal audit department reports CFO they will not have independence, they will have to oblige to CFO. By making them report to Internal audit committee which is comprised of directors including independent directors they will have independecnce and can report any findings.