While performing an audit of CCC Corporation, the audit team noticed something that didn't look right. The company's receivables aging report showed that bank loan receivables were approximately $91 million. That audit team calculated the bank loan edible receivables to be approximately $50 million. The client didn't identify specific accounts in witting off bad debts, there was extremely slow credit memo processing, and items the management had not focused on remained uncollectable and ineligible for financing. In addition, over the last two years, the company's credit department has had unusually high turnover--four different people had held the credit manager position under an intimidating CFO. The current credit manager was a friend of the CFO and had worked with him at a previous company. After looking at some invoices and asking about customer information to confirm, the credit manager admitted to creating false documents and arranging fictitious sales with client--all with the knowledge of the CFO.
1. What are some of the red flags that point to the possibility of fraud? Elaborate.
2. What would you say the main problem in this cast that allowed the fraud to occur? Elaborate.
1. Let's look at each part of this case, and see what could be going on, which will tell us why each part is a red flag.
* The receivables report showed the bank loan receivable was $91 million, and the actual balance of what the bank owed the company was $50 million. It can be suggested based on the preliminary investigation that the bank was sending in ample payments on the account, but the payments were being received (possibly late) and not recorded in the books of CCC. It is very common for employees in A/R to lap customer accounts. By doing so, they take in the money from the A/R that the bank paid, use the funds elsewhere (in another account, to pay for personal purchases from it being deposited into a draw account, etc). After a period of time, the company then records the payments in the A/R account. This could explain the difference in actual balances. Also, if the bank loan was determined to be a slow-pay (not likely, but in today's economy, you never know), and the company has written it on the books as a slow-pay, the manager could be taking in payments the bank is now making, and stealing the money being paid in. The manager can easily forge documents to make it look like the bank still isn't paying. In either case, the red flag here is the difference in balances between the aging report, and what the bank actually owes the company.
* The ...
The solution provides a detailed discussion of fraud red flags for CCC Corporation, and the facts that allowed the fraud to occur.