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    Family First Farm: Audit

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    Each year since 2007, the accounting firm of Goode and Thuro was contracted to prepare audited financial statements for Family First Farm. Each year until the current audit, the CPAs did not find any discrepancies. This year, Arthur Goode discovered quite a few discrepancies in Family First Farm's records. After some investigation, Arthur discovered Eva, who handled accounts receivable for Family First Farm, had embezzled approximately $50,000 in company checks and obtained a loan using falsified records. Instead of depositing checks into the company account, Eva endorsed and cashed approximately 75 checks made payable to Family First Farm over the course of nine months. In 2009, Eva falsified the accounting records to make it look like Family First Farm had more assets than the company actually owned. Eva then induced the local bank to give Family First Farm a loan based on these falsified records. The local bank president demanded the remainder of the loan be paid in full within 90 days. Family First Farm did not have the money to pay the loan. Which party or parties will be responsible for repayment of the loan to the bank? Are the accountants liable to anyone? Can Family First Farm recover the $50,000 in forged checks from Eva or the bank? Discuss why or why not.

    Please cite references and support all responses with appropriate cases, laws, and other relevant examples.

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    Solution Preview

    There are a couple problems with this case that make it complex. Many years ago, there was a clear separation between employee and employer. The acts of an employee were largely the responsibility of the employee. However, after fraud became a common occurrence with employees, customers, investors, and others hurt by the frauds began to complain (as they should), due to the losses, and the laws were changed to hold the employer accountable for the fraud, as well as the employee. The main reasoning is that in the majority of cases, the employers should be monitoring the employees through a properly established control environment, which would have prevented many of the frauds that took place.

    In this case, it was discovered that Eva, the A/R clerk, embezzled $50,000 in company checks and obtained a loan using falsified records. In this statement alone, Eva is guilty of embezzlement and loan fraud. You can't obtain any type of loan in any state with falsified documents. It is automatically a crime. It is interesting to note that she endorsed and cashed 75 checks made payable to the farm. I am assuming she deposited them into her bank account. In this case, her bank is also liable and completely negligent. A bank cannot deposit a company check into a person's account unless she is the signer on the Farm account, and as the A/R clerk, she wouldn't be a signer on the Farm account. A signer would be the CEO, CFO, or other person that actually needs to write company checks. In A/R, she wouldn't be writing checks, and singers are always typically managers or higher. We therefore have an issue with her bank not following standard procedure, as set by law for depositing checks into a financial institution.

    In 2009, she then falsified ...

    Solution Summary

    This solution provides extensive information, discussion, details and references for the "Family First Farm: Audit" question presented. The party or parties that are responsible for the repayment of the loan to the bank are clearly identified. The liability on behalf of the accountants is also thoroughly discussed. Answer is 6+ paragraphs long and discusses all relevant issues.