Case Study on Sam Lewis: Indulged in Fraudulent Activities
Case Study analysis
Forensic Accounting case study report
With the ramified economic changes, each and every organization are making efforts to strengthen their financial reporting frameworks by complying with or setting up harmonization in international and domestic accounting standards. The following report is prepared on the basis of answering certain questions that are framed upon a case study. The case study questions which have been taken into considerations are tried to be solved with the help of references taken from Cressey’s Fraud Triangle. The different areas that have been reflected through the preparation of this report hit light upon internal controls, evidence, the investigation plan and interviewing suspects. The following section of the report shall provide detailed description about the case under study. The first three questions highlight the different elements that are behind any fraud to make it shape reality. These include, the perceived pressures because of which the intent to do fraud popped, perceived opportunities that allowed the fraud to happen, and the rationalisation i.e. the logic that the fraudster have in justifying the crime to be fair act.
Answer to question no- 1
From this case identify what pressure might have motivated Sam to commit fraud.
In the given case, Sam Lewis who has been appointed as the manager Bar Lou’s Brasserie was earlier the manager of a nearby competing restaurant Stone. He has been appointed the manager at the Bar Lou’s Brasserie because of the vacancy of managing position at the restaurant. The place Stone where Sam earlier worked had now been closed. The acceptance of the managing position by Sam has been on the basis of his expertise work experience. But the salary at which Sam has been employed in Bar Lou’s Brasserie has been way less as compared to the salary at which he was employed at Stone. While at work in Bar Lou’s Brasserie, Sam has found to be indulged in fraudulent activities. These included stealing of cash in petty amount from the restaurant’s cashbox. Most of his personal expenditures were named in the business account. E.g. using company’s credit card to pay the petrol expenses for car that is used for personal purpose, family food meals, repairs to car etc. Due to this, the business expenditures were highly raised. He started to manipulate and falsify the business records. Doing wrong totalling of cash receipts of cash received on customer orders. All these comprised the main fraudulent activities that Sam was committing at the Bar Lou’s Brasserie restaurant.
However, there has to be certain pressure upon Sam Lewis that has been a motivating him to commit all the fraudulent activities. As per Cressey’s Fraud triangle the several pressures that motivate a person to commit fraud. This pressure is so intense that makes it unsolvable by the fraudster. Further, he finds it difficult to communicate the pressure with the people who might be there to help come out of the situation. Moreover, the person even does not find any legal or authorized way to get out of the same. The different pressures include financial stresses, workplace dues problems, and revenue shortfalls, gambling debt or other debt problems (Mansor, 2015).
In the given scenario the different pressures include heavy debt position because of his gambling addiction which was secret to everyone. The pressure caused by the responsibilities of married life as his wife was not working because of her responsibilities to take care of her old parents. Further, the salary that Sam was getting in the current job was way less than what he used to get in his previous job at Stone (Huang, Lin, Chiu, & Yen, 2017).
Answer to question no- 2
What opportunities might have allowed Sam to commit fraud?
A study of Cressey’s Fraud triangle reveals that only an intention to commit fraud would not let the fraud happen. The individual has to find the means that shall allow him to commit fraud. These means are eventually known as the opportunities to commit fraud. Usually, the position at which a person works in an organisation provides him the opportunity to abuse his authority and position. This abuse is done with the intention to solve the financial problems that seems non-communicable to the person and which cast a pressure upon him (Schuchter, & Levi, 2016). The main opportunity which Sam found in this case was related to less strengthen reporting frameworks. In addition to this, there are several situations in which Sam found to earn profit for his personal motives and these are the situations which influence Sam a lot about committing fraud.
In the given case the opportunities that allowed Sam were mainly connected to his questions able position as a manager of the Bar Lou’s Brasserie restaurant. Sam was the only signing authority and that has enabled him to give approval to al his personal expenditures as business expenses. He have also submitted bills for his family meals and car repairs and approved them as business expenses. Further, there was no computer system or other technology enabled substitute to take customer orders. The use of paper based manner to take customer order and direct receipt of cash also allowed Sam to commit cash related frauds (Roden, Cox, & Kim, 2016).
Answer to question no- 3
How do you think Sam rationalised his fraudulent activities?
Another aspect of Cressey’s Fraud triangle shows that almost every fraud story has certain element relating to rationalization. By rationalizing the fraud the attempt of the perpetrator is to minimise the dishonesty that is perceived for their fraudulent acts. Certain rationalisations that are commonly produced by the individuals committing fraud include:
- There is no harm caused to anyone.
- The money stolen is kind of borrowing which will be repaid soon.
- The return according to the work done is less.
- After the financial problem gets over, the money shall be refunded.
- There is debt on the organisation to pay me (Machado, & Gartner, 2017).
- High involvement of Sam in the reconciliation of the statement of company.
In the given case Sam also might have rationalised his fraudulent activities. The most appealing rationalisation from his side could be his feeling that the work he is doing at Bar Lou’s Brasserie demands at least a payment equal to or more than the payment he was receive at restaurant Stone. Further he also feels that it is because of the success that Bar Lou’s Brasserie has gained that has cause Stone to be closed. There might be a rationalisation stating the fault of success of Bar Lou’s Brasserie in him losing his past position and related financial return for which Bar Lou’s Brasserie must be charged (Huber, 2017).
Answer to question no- 4
Fully explain why internal controls are necessary in the fight against fraud and describe the main internal controls that could have reduced the opportunity for fraud in this case study.
Every organisation put internal controls in place in order to ensure that the account of the entity are prepared with full integrity, the assets are safeguarded and the frauds and/or theft if any is deterred and detected. Though the internal controls cannot prevent all the frauds from occurring completely, but could certainly help the organisation to fight against them. Through the implementation of internal controls, a continuous check can be enabled on the employees at every level. This check shall prevent them from exploiting the opportunities available to execute frauds. Effective internal controls when put correctly in the organisation helps in monitoring of the work that the employees are doing. The chances of employees cheating or committing a fraud are reduced as their work is being continuously reviewed in one or the other manner. certain internal controls that provide a significant monitoring of the employees work involve, rotation of the job; review of work by peers; surprise check; reconciliation of bank accounts; cash account reconciliations; and etc. (Rendon, & Rendon, 2015)
Different organisations need different internal controls depending on the kind of risk that they admit in their premises. In the given case Bar Lou’s Brasserie is mainly facing the frauds from the end of manager and they all revolve around cash. The frauds that happened could have been eliminated if the company had applied the following internal controls:
- Duty segregation of handling cash and totalling of cash receipts. A different employee should be surprisingly rotated at the place of Sam at times to check whether the totals made by him were accurate or not.
- Asking Sam to go on vacations at least once in a while. During his absence the accounts prepared and verified by him must have been rechecked to ascertain the accuracy of his work.
- The business expenses that have been verified must have been required to be checked against their respective slips by some peer employee to ascertain whether they have been actually incurred for business (Donelson, Ege, & McInnis, 2016).
- Regular check upon the manager’s cash handling activities by just walking and watching around randomly and recurrently.
- For travel expenses, proper documented papers must be checked regarding petrol, food, etc.
- Use of cloud computing or other technological device like computer to store the data related to customer orders and even taking orders and feeding data directly in system to avoid embezzlement (Frazer, 2016).
Answer to question no- 5
You are employed as the Forensic Accountant by Bart and Lou, explain the plan you would undertake before commencing the investigation.
Before commencing any formal investigation, forensic investigation also entails some proper planning to get desired results. Firstly there is a requirement to meet the client, i.e. Bar Lou’s Brasserie, to develop a clear and proper understanding relating to the fraud that has happened. It is required to arrive at a common understanding of the situation. The steps that client has taken since after getting aware of the fraud are also required to be known. This shall also help in gathering the outputs that the client expects from the investigation. After that the main documents dealing with cash, carbon copies of customer orders, any bank statements etc. are acquired to scrutinise them. Other information if required in the future course is also agreed by the client to be provided. Based upon the meeting and the documents acquired the procedures required to investigate are designed. It is only after the identification of the required documents and the design of the procedures that are required to commence an investigation, the actual commencement takes place. However, the design of the procedures varies from case to case. It is not necessary that a particular set of procedures shall lead to a proper investigation in case of every client (Hunton, Wright, & Wright, 2015).
Answer to question no- 6
Identify and explain which documents you think can help disclose Sam’s fraudulent activities?
The frauds that Sam committed did not come into the knowledge of Bart and Lou because of their negligible involvement in his working. They didn’t even care to check the documents of business because of their deep trust on manager Sam. However if the documents were being checked periodically at least, the frauds committed by Sam could have been avoided. As the fraud has happened, the documents that would have earlier prevented the fraud can only help disclose the fraudulent activities (Bailey, 2016). These include:
- The customer order book that contains the carbon copies of customer orders for different periods.
- The petty cash book. Reconciliation could be made with the customer order book to identify the cases of embezzlement with respective dates.
- If the restaurant has any bank account, a reconciliation statement with the bank pass book can also be done (Donelson, Ege, & McInnis, 2016).
- Proper hiring of the accounting and internal auditors who could check and assess the financial statement of company.
- The documents pertaining to travel expenses can prove their validity to be non-business expenditures that are veiled under the name of business expenditures.
- The income statement of the period for which manager Sam is working. This shall help in identifying the possible areas where revenues have been adjusted to reduce the profits (Van Akkeren, & Buckby, 2017).
- Identification of the possible mistakes and problems which have been found while auditing the financial statement.
Answer to question no- 7
Explain and give reasons whether you would interview Sam.
Interviews under a forensic investigation are a method to gather evidences. These evidences provide usable information to understand the kind of fraud and the parties involved. Whenever any forensic investigation is undertaken, the first step that is most important is to interview the possible fraudster. Several answer to questions have been given regarding the fraud have to be asked relating to the reasons, the quantum and time of fraud. However, the possible responses may not be truthful, but conducting the interview digs the matter deeper and gives more useful insights. Through the interview process only reasonable evidences can be gathered that can further pave a way to newer investigation areas that are not known before (Van Akkeren, & Buckby, 2017).
In the given case, the possible and most obvious suspect is Sam, the manager. The most obvious step to be taken at hand is interviewing him to get an insight into his side of story. By interviewing him, maybe true responses won’t get available, but some sort of evidence could be obtained. Several instances may appear that were completely not known earlier. Hence, it gets important to interview him, before any further step is taken (Ozili, 2015). If these steps are done then proper reason of fraud and possible steps could be identified.
After assessing the case study and details given in the work, it is found that the frauds that Sam committed did not come into the knowledge of Bart and Lou because of their negligible involvement in his working. Sam has found to be indulged in fraudulent activities which shows that fraud has been done on Sam’s part for his personal benefits. It shows that company has failed to comply with the international accounting standards and did not keep the proper records of the books of account and fraud popped, perceived opportunities that allowed the fraud to happen, and the rationalisation has also been found. However, in order to collect proper evidence, it is necessary to gets important to interview Sam, before any further step is taken. Nonetheless, income statement, books of account and other documents would be used to assess the necessary details regarding the work and will help in evaluating the case and identifying the problems arise in this case.