Homework answers / question archive / Class,  Here we go with our first discussion! Before we start, I’ll highlight some important discussion participation points: 1

Class,  Here we go with our first discussion! Before we start, I’ll highlight some important discussion participation points: 1

Accounting

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Class, 
Here we go with our first discussion! Before we start, I’ll highlight some important discussion participation
points:
1. Your first post is due in this discussion by Wednesday.
2. Make a minimum of 2 full credit posts.
3. Post on a minimum of two separate days during the week.
4. I will continue to post more cases throughout the week.
5. You are not required to respond to the first case and you are not required to respond to all of the
cases I post.
6. Students will not receive credit for posts that respond directly to a case AFTER I have posted the case
decision for it. Basically, once I have posted the “answer” to the case, you will then post instead to the
follow up questions or to a new case or to a classmate.
Move forward with the discussion as new cases and follow up questions are posted. We want to discuss
the case decisions, too.
If you have not already done so, please read the Discussion Participation Requirements in Course
Content for the details regarding discussion participation.
Let’s begin!
We will be working on cases from the text throughout the semester. Here is our first one:
Gus Jackson was hired from a Big Four public accounting firm to start a new internal audit function for
ABC Company, a newly acquired subsidiary of a large organization. His first tasks involved getting to
know ABC management and supporting the public accountants in their year-end audit work.
Once the year-end work was wrapped up, Gus started an audit of the accounts payable function. He was
supported in that audit activity by Jane Ramon, who had worked on the parent company’s internal audit
staff for about four years.
The accounts payable audit went smoothly, although many employees made no effort to conceal their
hostility and resentment toward anyone associated with the new parent company. One exception was
Hank Duckworth, the accounts payable manager. Hank was extremely helpful and complimentary of the
professional approach used by the auditors. Gus had actually met Hank four years earlier, when Hank
had been an accounting supervisor for an audit client where Gus was the junior accountant.
As the audit neared completion, Gus reviewed an audit comment Jane had written—a statement
concerning some accounts payable checks that lacked complete endorsement by the payees. Both Gus
and Jane recognized that in some situations and in some organizations less-than-perfect endorsements
were not a critical concern; but these checks were payable to dual payees, and the endorsement of each
payee was required. Gus asked Jane to make some photocopies of the examples so the evidence would
be available for the audit close-out meeting with management.
Jane returned 20 minutes later with a puzzled expression. “I pulled the examples,” she said, “but look at
these!” Jane placed five checks on the desk in front of Gus. “What do you make of these?” she asked.
“Make of what?” asked Gus.
“Don’t you see it? The handwriting on all the endorsements looks the same, even though the names are
different! And these are manual checks, which in this system usually means they were walked through
the system as rush payments.”
“They do look similar,” Gus replied, “but a lot of people have similar handwriting.”

It hit Jane and Gus at the same time. All five checks had been cashed at the same convenience store
less than five miles from the home office, even though the mailing address of the payee on one of the
checks was over 200 miles away!
Jane decided to pull the supporting documentation for the payments but found there was none! She then
identified other payments to the same payees and retrieved the paid checks. The endorsements did not
look at all like the endorsements on the suspicious checks. To determine which of the endorsements
were authentic, Jane located other examples of the payees’ signatures in the lease, correspondence, and
personnel files. The checks with supporting documentation matched other signatures on file for the
payees.
Gus and Jane decided to assess the extent of the problem while investigating quietly. They wanted to
avoid prematurely alerting perpetrators or management that an investigation was underway. With the help
of other internal auditors from the parent company, they worked after normal business hours and
reviewed endorsements on 60,000 paid checks in three nights. Ninety-five checks that had been cashed
at the convenience store were identified.
Still, all Gus and Jane had were suspicions—no proof. They decided to alert executive management at
the subsidiary and get their help for the next steps.
Since the subsidiary had little experience with dishonest and fraudulent activity, it had no formalized
approach or written fraud policy. Gus and Jane, therefore, maintained control of the investigation all the
way to conclusion. With the help of operating management, the auditors contacted carefully selected
payees. As is often the case involving fictitious payments to real payees, the real payees had no
knowledge of the payments and had no money due to them. The auditors obtained affidavits of forgery.
In order to identify the perpetrator, the auditors documented the processing in more detail than had been
done in the original preliminary survey for the routine audit. There were seven people who had access,
opportunity, and knowledge to commit the fraud. The auditors then prepared a personnel spreadsheet
detailing information about every employee in the department. The spreadsheet revealed that one
employee had evidence of severe financial problems in his personnel file. It also showed that Hank
Duckworth’s former residence was three blocks from the convenience store.
Armed with the affidavits of forgery, the auditors advised management that the case was no longer
merely based on suspicions. Along with members of operating management, the auditors confronted the
convenience store owners to learn why they had cashed the checks, and who had cashed them.
The convenience store manager had a ready answer. “We cash those for Hank Duckworth. He brings in
several checks a month to be cashed. He used to live down the street. Never had one of those checks
come back!”
The rest is history. Hank was confronted, and he confessed. The fully documented case was turned over
to law enforcement. Hank pled guilty and received a probated sentence in return for full restitution, which
he paid.
What clues caused Jane to suspect that fraud was involved?
Why is it important for fraud examiners to follow up on even the smallest inconsistencies?
In an attempt to identify possible suspects, the auditors researched the personal files of every employee
in the department. What things might they have been looking for to help them identify possible suspects?