“WHODUNIT?

prepared by Karen Collins, Lehigh University

with facts relating to an actual

embezzlement case

Case Study

submitted by:

Avon Jade C. Ramos

Ellha Jenn A. Hibanada

Jheacky E. Umbay

October 2018
Case Background

“Whodunit?” is an embezzlement case involving a small town business located on

the eastern shore of Maryland. It is a family-run business that earns from supplying
crabmeat to various restaurants in Maryland. With its current control system in place,
everything seemed to be going well until the business lost $40,000 in less than two
months. The owners, including the auditor that was hired is now trying to figure out who
was responsible for the theft and how it was perpetrated.

Characters and Responsibilities

*names are made up

 John Smith - heads the crabmeat processing business, president and stockholder
of the entity

- has the primary responsibility of receiving orders from customers and

overseeing the entire production process

- takes charge of opening mails, signing checks and preparing bank

reconciliations

 Susan Smith - wife of John Smith, vice president and stockholder of the entity

- responsible for preparing bank deposit tickets and making bank

deposits, and is expected to prepare checks for payroll and
payments of accounts payable

- constructs daily sales reports which she summarizes to obtain

monthly sales reports

- performs the role of obtaining the running summaries of the programs

and inputting them into the General Ledger program

- analyzes the company’s trial balance and open balances in accounts

receivable and accounts payable

 Tommy Smith - son of John and Susan, shipping manager

- helps John in overseeing the production of crabmeat

  Debbie Jones - office worker and her parents have been friends with the Smiths for
nearly a decade
- mainly responsible for billing customers by entering sales data into
the accounts receivable program and recording the receipt of cash
and checks which is also entered in the same program
- shares a lot of responsibilities with Susan, such as preparing bank
deposit tickets and making bank deposits, preparing checks,
constructing daily and monthly sales reports and inputting the
running summaries of programs into the General Ledger program

Required:

a) If you were asked to help this company, could you conclude from the evidence
presented that an embezzlement took place? What would you do next?

It can be concluded that an embezzlement had taken place and someone working
for the company had taken the cash. The use of the address stamp instead of the for
deposit only stamp was already a give-away to makes things look very much like an
embezzlement. Some accounting records have also been altered just like how the
accounts receivable listing had been split or ripped apart, further suggesting that
someone might have run the report several times and pieced it together. Detailed
accounts receivable balances also did not add up to the summary totals at the end of the
report.
The next step would be to secure a copy of the cancelled check then bring it to the
bank to determine if it has been cashed. Immediate steps must be taken to prevent the
embezzlement from continuing. The bank could be held liable for cashing the check
because the corporation had given the bank written instructions specifying that all checks
made payable to the corporation should be deposited into the corporation’s checking
account but the bank did not follow this.
b) Who do you think was the embezzler?

Based on the case facts and our analysis of how the fraud could be reasonably
believed to have occurred, it can be said that Debbie is the perpetrator. Her control over
physical assets and recordkeeping responsibilities enabled her to steal the USD 40,000.
One of the possible ways to do it is through not recording some sales and keeping the
checks from payments on these sales. The fact that Debbie may have tried to cover things
up by possibly tampering with the records and presenting a false bank deposit slip points
to her as being the person guilty of the embezzlement.

Points to consider:
- She had access to cash;
- She had access to the accounting records;
- She occasionally uses the incorrect address stamp rather than the “for deposit only”
stamp;
- She was working on the microcomputer and purposely trashed the accounts receivable
file in order to hide evidence;
- She presented Susan with a deposit ticket that was not verified by the bank and did
not add up to the correct total (indicating that the deposit was not processed by the
bank);
- She had set up an office in the bathroom, stocking a cabinet with things like pens,
deposit tickets, stationery, and a stapler (except a calculator that she could have used,
given the fact that the fraudulent deposit ticket was added incorrectly)

The original deposit ticket must be so: But her deposit ticket would look like this:

Check #1 $ 282.20 Check #1 $ 282.20

Check #2 1,000.00 Check #2 1,000.00
Check #3 20,000.00 Check #3 15,000.00
Total $ 21,282.20 Check #4 5,000.00
Total $ 21,282.00 (her math error)

She reduced the amount of Check #3 by $5,000 and added Check #4 for this amount.
c) How was the embezzlement accomplished?
Debbie Jones was able to carry out the embezzlement by lapping of accounts
receivable. The details of her deeds are as follows:

TRANSACTIONS ACTION TAKEN

Sale #1
Credit $ 5,000.00
Payment #1 kept the payment #1. Debbie now
needed to zero out the balance to avoid
sending monthly bills to the customer

Sale #2 didn’t record the sale; she will use the

payment of sale #2 for sale #1 to cover
up the check she stole from the
customer
Payment #2 Dedit $ 5,000.00
Sale #3 Credit $ 5,000.00
Payment #3 Dedit $ 5,000.00
Sale #4 Credit $ 5,000.00
Payment #4 Dedit $ 5,000.00
Balance, month-end $0.00

She kept the payment for sale #1 and used the payment for sale #2, which she
never recorded, in order to pay for the sale #1. Hence, she was able to end up with a zero
balance in the account at the end of the month, and she could happily continue with her
embezzlement game. However, she didn’t dispose of the invoice for sale #2, resulting to
her numerous run of the account receivable program and attempts on destroying the
computer software. This raises suspicion on the possibility of a sale that transpired but
was not entered into the computer system.
d) What improvements would you recommend in internal control to prevent this
from happening again? In answering this question, try to identify at least one
suggestion from each of the six classes of internal control activities discussed
in this chapter (under the section “Control Activities”): transaction
authorization, segregation of duties, supervision, accounting records, access
control, and independent verification.

 Transaction Authorization
Since he is not in charge of the accounting records, John, being the
president, should make listings of incoming checks or a cash prelist every time he
opens the mail. This cash prelist could later be compared with the deposit ticket to
guarantee that all checks received are deposited.

 Segregation of Duties
Currently, multiple individuals may perform particular tasks. This increases
the risk for fraudulent activities since it would be harder to pinpoint who is primarily
accountable if several individuals have access to a particular task. Individuals who
are responsible for receiving or disbursing cash/checks must not have access to
accounting records and vice versa. These must be handled by distinct individuals
to avoid manipulation of records and the possibility of misappropriation of assets.

 Supervision
Given the fact that the company had too few employees to achieve
adequate separation of functions, the company should have closely supervised.
Strict supervision is the key to this case.
 Accounting Records
Subsidiary ledgers should be automatically integrated to the general ledger.
Transferring records manually from the subsidiary ledger to the general ledger
poses the risk of committing errors or fraud. The person in charge of accounting
records may conceal such.
Pre-numbered invoice forms allow the company to identify missing
transactions. This prevents employees from lapping an entire transaction from the
company accounting records and keeping the cash receipts from the customers.
The practice of billing all customers will provide a standard procedure which
will be applied to all. The possibility of human error is reduced in preparing the
billing statement if it is done for all as compared to initially identifying customers
who are behind in payments. Moreover, having complete billing records provides
the company with an official document which may be used as audit trail.
An extra copy of the sales invoice should have been supplied to the
customer. The customer should have been asked to return the extra copy of the
invoice with the payment. The returned invoice would provide an audit trail linking
payments with specific sales. (Thus Debbie could not have easily matched the
payment for Sale #2, which she did not record, with Sale #1).

 Access Control
Having access to the accounting records and to the checks allowed Debbie
to steal. She should not have had access to incoming checks, the accounting
records, and other documents such as deposit tickets and stationery.
To improve the company’s control system, key functions must be assigned
and performed by a single individual who would primarily be accountable. Other
individuals may not have access to functions outside their own responsibilities.

 Independent Verification
A system should have been established providing independent verification
of the accuracy of the accounting records. The company prepared a weekly sales
report that should have been a check on sales as recorded in the accounting
 records. Unfortunately, though, Debbie often prepared the sales report (which she
could falsify), the same should have been prepared instead by Tommy, the son of
the owners who was in charge of shipping. Also, the ending balance of accounts
receivable could have been checked daily using information obtained from different
individuals. This check could have been done as follows:

Beginning AR balance (per accounting records)

+ Sales (per Tommy who was in charge of shipping)
– Collections (per John who was in charge of opening the mail and preparing the
cash prelist)
+/– Adjustments (as authorized by Susan, an owner)
= Ending AR balance (per accounting records)

e) Would the fact that the records were maintained in a microcomputer aid in this
embezzlement scheme?

Yes, keeping their records in a microcomputer did aid u this embezzlement

scheme since this microcomputer system lacks stringent controls in terms of access.
The company also has not established a proper internal control when it comes to the
segregation of duties. Multiple people are responsible for the accounting records and
inputting these data into the accounting programs, meaning they have access to the
computer records. Files entered into the microcomputer can be easily modified,
manipulated and/or deleted by any of them, making it easy for any person to destroy
or delete any evidence of a fraudulent act. The problem here was not in hiring
someone to help, because obviously the business is undermanned. It is in not building
up the proper controls and properly supervising the individual to prevent not just
embezzlement but also any fraud that may occur.