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Detect, prevent anddeal with employee fraud-three situations

1. Yvette, a CEO of a large manufacturing company, recently attended a seminar about fraud prevention. She suspects that frauds have already been committed in her company. She decided one technique she would use to help uncover the fraud and prevent future frauds in her company, is to conduct interviews of employees. She realizes interviews can be a delicate issue if she wants confessions out of guilty parties. She knows that planning is the first and most crucial part of the process.

What should she be aware as she plans the interviews?

2. You just started your own roofing business, and you have hired ten new employees. Two of the new employees are responsible for taking care of all of the administrative functions of the company. The other eight employees are divided into two work groups of four that will go to different job sites and replace old roofing material with new material.

You are aware that fraud prevention is necessary, since fraud is likely to occur in any company. Because you have never operated your own business before, you are unsure where to begin in order to protect your assets from being stolen. You decide to search the Internet to discover the types of opportunities that exist for employees to steal assets.

Identify and discuss the different types of opportunities that exist for employees to steal assets from your company. What can you do to eliminate these fraud risks?

3. ExtractIt was the world's leading company in extracting blood. It had a number of charity and paid blood drives, which gave it the largest blood supply in the world. ExtractIt was based on a profitable model, but in the last few decades, it had been focusing more on not-for-profit transactions because the demand for blood was increasing, but the ability to pay for the blood was decreasing. ExtractIt was doing well for a blood-extraction company, unless you compared it to the companies only in the business to make a profit.

Slowly, employees and outsiders alike realized that ExtractIt was declining in profits and could soon become a not-for-profit blood extraction company. The auditors realized the direction in which the company was going and resigned after not being paid for the previous year's audit. The internal auditors started performing most of the financial statement audit functions and found company records to be in perfect order. However, after a short time period, the auditors noticed that Jack, the company's CEO, was showing up to work in a new car each day. He claimed that he had saved a fortune and finally decided to spend the money on his passion-cars.

The internal auditors, after seeing the sudden change, decided to analyze the company to ensure that fraud was not being committed by the CEO. To analyze the company, the internal auditors knew only to compute the following ratios:
Gross profit margin
Accounts Receivable Turnover
Number of days in receivables
Earnings per share

2002 2001
Sales 1,000,000 1,200,000
COGS 800,000 960,000
Accounts Receivable 500,000 600,000
Net Income 52,000 103,000
No. of shares outstanding 100,000 100,000

Upon computing the above ratios, the internal auditors found nothing suspicious and concluded that fraud did not exist.

A. Compute the ratios listed above. Is there anything specific you see in the ratios that would indicate fraud?
B. How else could the internal auditors have searched for/found fraud?

Thank you

Solution Preview

1. Yvette, a CEO of a large manufacturing company, recently attended a seminar about fraud prevention. She suspects that frauds have already been committed in her company. She decided one technique she would use to help uncover the fraud and prevent future frauds in her company, is to conduct interviews of employees. She realizes interviews can be a delicate issue if she wants confessions out of guilty parties. She knows that planning is the first and most crucial part of the process.

What should she be aware as she plans the interviews?

Firstly, Yvette, a CEO of a large manufacturing company, has to first ensure that she should make the employees to feel that she is not going to conduct interview in order to find out the fraud. Because, if the fraudulent employees come to know the intention of the CEO, then they will be alert and will be successful in hiding the fraud.

Second, she has to select the employees depending upon their job profiles who are more prone to make fraud like cashier, employee in charge of stock verification etc.

Third, she should plan to conduct the interview in a very informal manner in such a way that she can extract more information from the employees than in formal interview.

Fourth, she should conduct the interview in the phased manner and she should fix the proper time and proper place to conduct interview.

Fifth, she has to design the standard questionnaire well in advance in such a way that she could succeed in her venture.

2. You just started your own roofing business, and you have hired ten new employees. Two of the new employees are responsible for taking care of all of the administrative functions of the company. The other eight employees are divided into two work groups of four that will go to different job sites and replace old roofing material with new material.

You are aware that fraud prevention is necessary, since fraud is likely to occur in any company. Because you have never operated your own business before, you are unsure where to begin in order to protect your assets from being stolen. You decide to search the Internet to discover the types of opportunities that exist for employees to steal assets.

Identify and discuss the different types of opportunities that exist for ...

Solution Summary

The solution contains answers for detection, prevention and dealing with fraud under three different situations and also opportunities that exist for commiting fraud in the organisation and the steps that should be taken to prevent the frauds.

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