G64. Part 1; Introduction 10 Fraud
the lawns on their daily schedule, This is where the
owner bas hired his children to work, and the whole
team is usually made up of younger workers than the
team that works with the chemicals
‘Over the years, Green Grass has experienced small
growth and success. Profits have inereased steadily as
the company has picked up new clients. However, the
owner noticed that last year's accounts were different
‘The revenues increased a marginal amount, while the
expenses for the company increased more than they
should have. The owner has noticed that his interac-
tions with his friend in the office have been fewer and
not quite so friendly. Also, his employees have been
finishing their routes later in the day than they had
in previous years.
Questions
11, What are some of the fraud opportunities within
Green Grass?
2. What symptoms of fraud exist, and what
symptoms should the owner look for if he
believes fraud may be occurring?
3, What steps should be taken to make sure fraud.
does not occur, and what are the costs associated
with these steps?
Case Study 2
James Watkins, an ambitious 22-year-old, started an
entertainment business called Best Club after he grad-
tated from California State University. Best Club int
tially was a business failure because James ignored day
to-day operations and cost controls, One year later,
James was heavily in debt. Despite his debt, James
decided to open another location of Best Club. He
fident that Best Club would bring him financial
“However, as his expenses increased, James could not
meet his debts. He turned to insurance fraud to save his
business. He would stage a break-in at a Best Club
Jocation and then claim a loss. In addition, he reported
fictitious equipment to secure loans, falsified work
order contracts to secure loans, stole money orders for
cash, and added zeros to customers’ ills that were paid
‘with credit cards. James was living the “good life,” with
fan expensive house and a new sports ear
‘Two years later, James decided to make Best Club a
public corporation, He falsified financial statements to
greatly improve the reported financial position of
Best Club. In order to avoid the SEC's serutiny of his
financial statements, he merged Best Club with Red
House, an inactive New York computer firm, and
acquired Red Houses publicly owned shares in exchange
for stock in the newly formed corporation. The firm
became knovin as Red House, and the Best Club name
‘was dropped. ames personally received 79 percent ofthe
shares. He was now worth $24 milion on paper. James
‘was continually raising money from new investors to Pay
off debts. A few months later, Red House's stock was
Selling for $21 a share, and the company’s book value
‘was $310 million, James was worth $190 million on
paper. A short time later, he met John Gagne, president
OfAM Firm, an advertising service, Gagne agreed to raise
$100 millon, via junk bonds, for Red House to buy out
Sun Society, a travel service
‘Afterward, with television appearances, James
became a *hot figure” and developed a reputation as
an entrepreneurial genius. However, this reputation
changed after an investigative report was published in
4 major newspaper. The report chronicled some of his
early credit card frauds. Within two weeks, Red
House's stock plummeted from $21 to $5
‘After an investigation, James was charged with
insurance, bank, stock, and mail frauds money launder
ings and tax evasion; and Red House's shares were sell-
ing for just pennies, A company once supposedly worth
hhundreds of millions of collars dropped in value to
only $48,000
Questions
From this case, identify
4. The pressures, opportunities, and rationalizations
that led James to commit this fraud.
2. The signs that could signal a possible fraud.
3. Controls or actions that could have detected
James's behavior
Case Study 3
Johnson Manufacturing, a diversified manufacturer,
hhas seven divisions that operate in the United States,
Mexico, and Canada, Johnson Manufacturing has his-
torically allowed its divisions to operate independent.
Corporate intervention occurs only when planned
results are not obtained. Corporate management has
high integrity, although the board of directors is not
very active, Johnson has a policy of performing
employee screenings on all employees before hiring
them, Johnson feels its employees are all well educated
and honest.
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