Group 2 Writing assignment 3

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School

Wayne State University *

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7320

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Business

Date

May 12, 2024

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docx

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Group 2: Christina Evans, Liberty Hunter, Dean Klingensmith, Evan Lemak, Dasia Parks Group Writing Assignment 3 - (Cost-Volume-Profit Analysis) Complete Ch 12 Cases (Review Questions 79, 80 & 81) 79. Harry Mendelson began his fraud investigation with great optimism. He was investigating a simple embezzlement from accounts receivables, in a small business with only one employee, and only the bookkeeper had ever had access to the Intuit Quickbooks accounting files. The bookkeeper was fired the day before Harry arrived. When Harry opened the Quickbooks system, he immediately noticed all kinds of strange entries that made no sense at all. After several hours of carefully studying the cash and accounts receivables, he concluded that the Quickbooks records were of no help. Next he discovered that there were no paper statements or deposit records for the company’s bank account. After obtaining the online access credentials for the company’s bank account, he was able to log in and view bank statements for the last 12 months, but all deposits simply showed up as lump sums with no reference to which portions were made in cash or in checks from customers. His client was a small insurance agency. Many clients of the agency made their payments at the agency’s front desk, sometimes with cash and sometimes by check. Other clients sent their checks by mail. The bookkeeper opened all the mail. The front desk kept a list of all incoming payments before passing the checks on to the bookkeeper, but the list was only maintained sporadically and was, therefore, not reliable. The owner was certain that the bookkeeper had embezzled a lot of money, but Harry is wondering if he should withdraw from the engagement due to the lack of data needed to conduct a reasonable investigation. Required: What do you think Harry should do? What can he do? Is any kind of reasonable investigation possible? Although there is lack of data needed to conduct a reasonable investigation, Harry can attempt to estimate the loss of the company by using reasonable means available for taxing purposes. For instance, Harry can gather the estimated amount that the company collected from the front desk list and compare it to the bank statements. By doing this, he can see the difference between the totals and gain a better understanding of how much may have been embezzled. However, since the list is not reliable, Harry may have to use video surveillance in the office to help him estimate (if camera footage is available). When the company fired the bookkeeper without a complete investigation, they did not take into consideration that case building and expert testimony may also be required in addition to the fraud report. Since independent fraud investigators do not generally state that specific suspects are guilty of fraud, Harry would have to be very careful with how he expresses his opinion in his report. If the company would have

allowed the bookkeeper to continue to work, they may have been able to gather helpful evidence to build a case against them. Evidence showing an apparent shortage in deposits of customer receipts is not possible without a reliable list of deposits or accurate journal entries. Without these two things, Harry can not reconcile the bank statements with the cash receipts records. The loss remains an apparent loss for the company, unless Harry can rule out various reasonable explanations with a reliable amount that the company was collecting from customers. With reliable amounts that the company has collected, Harry could rule out if the money was deposited into the wrong account, if it was deposited late and appeared on the next month’s statement, if the cash receipts records are in error, or if the bookkeeper who made the deposits did not receive the full amount of cash. Without reliable information to go off of, the reverse proof process can not be complete. Harry cannot draw any conclusions as to whether the apparent loss is a real loss. If, however, Harry decided to investigate, there would only be one lead in the investigation. Since the bookkeeper was the only one who had access to the Quickbooks system and opened up the mail, Harry’s report may include something like, “There was a series of irregular computerized journal entries made in the accounts receivables ledgers and corresponding shortages in the Cash account. The employee in charge of the computerized journal entries was fired from the company before this investigation began and was not available for an interview. The owner states that only the former employee had access to the journals in question.” The wording in this report suggests that the former employee may have embezzled funds from collections on account by making irregular journal entries. However, the report cannot guarantee that the bookkeeper did so, nor can it definitively conclude that a fraud occurred. Since the bookkeeper had more than one role in the company, the investigation would be very difficult to investigate without reliable numbers or journal entries. 80. Janet Markleson ran a profitable used-car business until the business failed as a result of an embezzling financial manager. The officers of the company were as follows: Janet was the president and treasurer, and her husband (now her ex- husband) was the secretary. All ownership equity in the business had been lost when the company’s financial manager cleaned out all the bank accounts, including one trust account whose balance was to be remitted to consignment customers. In all, the financial manager managed to run away with over $432,000 from those accounts. Rumors circulated that he had left the country. The financial manager also cleaned out the company’s trust fund account that was being used to remit payroll taxes to the IRS and to state tax authorities. The loss in that account amounted to $74,221.54.

Janet hired a forensic accountant, whose final report clearly indicated the losses, although it only identified the financial manager as a suspect and not a guilty party. No guilty party was clearly identified in the report. Janet’s husband, Mark Merkleson, never had had any involvement in the business. He worked as a salesman in a local department store, and after years of hard work he had managed to save up enough money to make a down payment on his first house, which he had planned to share with his new wife and raise a family. Janet was bitter. Despite the forensic report the police wouldn’t seek an arrest warrant. She was told that even if they did prosecute, it would be impossible to get the suspect extradited from another country. She learned that extraditions can be expensive, and that local authorities didn’t have the budget to even pay the plane fare required to repatriate criminals in extradition proceedings. About a month after the business failed, Janet woke up one day to find that someone had filed a complaint with the state revenue office, saying that she had stolen the pay- roll trust fund due to the state. She heard from a friend that it was the financial manager who had filed the complaint. She tried to tell the criminal investigators from the revenue department that the financial manager had stolen the money. She showed them the forensic accounting report, but they seemed unimpressed by it and advised her that she was a target of a criminal investigation. A few months later things got much worse. Her ex-husband Mark called her, furious, and told her that the IRS had just frozen his bank account, one day before he was supposed to close on buying his first house. He was close to crying, because his real estate sales contract had a clause that required him to close on time or lose a $10,000 deposit he had used as part of the sales agreement. So he was going to lose both his deposit and dream house. Required: Is there anything Janet can do to help her ex-husband? Why was his bank account frozen? Would it help if the financial manager were arrested? Janet could supply the forensic accountant’s report, which identifies the financial manager as a suspect. Janet or Mark should directly communicate with the IRS to clarify Mark's role in the business and explain that he was not involved in the financial misconduct or embezzlement. Janet should prepare to defend herself against any criminal allegations related to the missing payroll taxes. This might involve legal representation to protect her rights and present evidence of the embezzlement by the financial manager. Mark's bank account was likely frozen by the IRS due to issues related to taxes owed by Janet's business. Since Janet was the president and treasurer of the company and was responsible for remitting payroll taxes to the IRS, the failure of the business to pay these taxes likely caused IRS actions against both Janet and Mark. The freezing of Mark's

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