Assessment 4: specialized fraud areas

 

Write 4-5 pages in response to the items listed for each of the four case studies included in this assessment.

Introduction

Just when you probably thought there were no additional responsibilities for an investigative accountant and no other areas to which they could provide expertise, along come several more areas where an investigative accountant can apply the tools of the trade.

First are financial crimes, where the accountant can use investigative skills. Bankruptcy is not something readily associated with this type of accountant, but keep in mind that individuals and companies may hide property and engage in a host of other fraudulent activities in the bankruptcy process.

Then there are divorce fraud and identity theft, both ripe areas where the investigative accountant may be needed to settle disputes or track down identity thieves who use those identities to commit fraud.

Investigative accounting can be used to root out organized crime, terrorism, and money-laundering schemes. For each of these, the investigative accountant working in conjunction with law enforcement can analyze, trace, data mine, and identify guilty parties using the accountant’s computer skills.

Preparation

For this assessment, you must analyze the four case studies and respond to the items listed for each case study. Reviewing the resources for this assessment will give you a good start toward preparation for the assessment.

Case Studies

Case 1

Lisa Brown is the CEO of a software company. Ralph Benson has been preparing Lisa’s annual tax returns for several years, and he provides other consulting services for her company. He is a CPA. This year Lisa brought Ralph a large envelope filled with receipts and documents relating to her taxes. While reviewing the documents, Ralph came across something new. It was a deposit receipt in the amount of $72,000 from a foreign trust. The receipt was signed by an attorney and contained a note saying that the deposit was for a trust account for the benefit of Lisa Brown. Ralph asked Lisa to explain the origin of the receipt.

Lisa told Ralph to ignore the receipt and pretend he had never seen it. Ralph wonders if Lisa is trying to avoid reporting income from the trust and avoid paying taxes on the income. He also knows that the existence of a foreign trust must be reported on her tax return.

Write a response to the following:

  1. How should Ralph handle this situation?
    1. Should he immediately withdraw from the engagement without discussing it further?
    2. Should he tell Lisa that she must report the foreign trust and any related income?
    3. Should he report the incident to the IRS or other authorities and continue to consult for her company?
Case 2

Christina and Jose Garza are in the process of getting a divorce. Christina suspects that Jose is hiding assets to keep them from being considered in the divorce settlement. She has hired a forensic accountant, Rick Harris, to investigate the possibility of hidden assets.

Christina suspects that Jose owns a property in Mexico that he has kept secret from her. Jose has traveled to Mexico on business for years. Several months ago she received a phone call from a man in Mexico who claimed to be a property manager for a property she and Jose owned in Mexico. The man gave only his first name, Julio. Julio mentioned the location of the property, but it was not a place that was familiar to Christina. She has forgotten what it was. When Julio realized that Christina knew nothing about the property, he hung up.

Christina’s divorce attorney deposed Jose and asked detailed questions about the property in Mexico and the property manager, but Jose denied knowing anything about them.

During their marriage of 25 years, Jose has had high-level jobs with a multi-national corporation. Christina knew he made a lot of money, but she never knew exactly how much or about any details of the family’s finances. Now she feels unprepared to negotiate in the divorce proceedings because she knows so little about the important financial information.

Write responses to the following:

  1. Explain how the forensic accountant should proceed with his investigation for Christina.
  2. If Jose owns a property in Mexico that he has kept secret, what do you think is the probability that the forensic accountant can discover it?
Case 3

Patrick Edwards’ parents died recently in a freak accident. He is the executor of their estate. Provisions of their will divide the estate equally among his two brothers, Wesley and Mark, and himself with a few special provisions. The estate consists of cash and marketable securities worth $7.3 million and a duplex located on the beach on Padre Island. 

One provision in the will allows the youngest brother, Mark, to keep the duplex as part of his share of the estate, and he wants to do that. This means that Patrick must come up with a market value for the duplex in order to determine what will be the equal division of the estate.

Valuing the duplex is not an easy proposition because of the unusual nature of the property. Part of the lot has a conservation easement, which means that it can never be sold to a developer for more dense development. In Patrick’s search of that entire area of the island, he did not find any other waterfront properties with a similar arrangement.

Patrick was able to find a few somewhat comparable properties in that area that had sold recently. All were considerably newer, and all properties had one more living unit than the estate property. The average selling price of these comparable properties was $1.2 million and average annual rental income was $36,000 per year per building after expenses.

The estimate for the replacement cost of the duplex in the estate is $650,000. The average estimated replacement cost for the comparable properties is $950,000.

As another factor, the owner of a neighboring property has always wanted more open space and would like to buy the property and tear down the duplex. He is willing to pay $1.3 million for the estate property.

Mark has a sentimental attachment to the duplex and does not want to sell it. He wants Patrick to value the property accordingly. Mark and Wesley have agreed to accept whatever valuation Patrick decides on.

Write responses to the following:

  1. How should Patrick value the duplex apartment building? 
  2. Support your response with generally accepted accounting principles.
Case 4

Cindy Williams is the owner of Williams Concrete Company. Her company fabricates and supplies pre-cast concrete slabs for home construction throughout the Omaha area. Dunn Construction, one of her highest volume customers recently discovered a problem with slabs supplied by Williams Concrete. Dunn is a major home builder that focuses on the upscale housing market. In most months, Williams Concrete supplies Dunn with hundreds of pre-cast slabs. 

Because of an error in the fabrication process, the concrete slabs for 23 of Dunn’s new homes did not meet basic materials requirements. This was not discovered until after the homes were completed. It has been determined that none of these homes are safe for habitation. Homeowners must move out and the slabs must be replaced at a considerable cost and months of inconvenience for the homeowners. As a result, Dunns’ reputation has suffered.

The slab fabrication process is complex and the possibility of a problem like this was not unforeseen. For this reason, Williams’ sales contracts with all vendors make it the responsibility of the purchaser to test the quality of all slabs before installation.

Dunn contends that despite this provision in the contract, Williams could be reasonably expected to supply quality slabs and they should assume the liability for the current problems. Dunn is demanding that Williams pay $20 million to cover the damages.

Write responses to the following:

  1. From Williams’s point of view, is litigation or Alternative Dispute Resolution (ADR) preferred? Why? 
  2. From Dunn’s point of view, is litigation or ADR preferred? Why? 
  3. Which form of ADR could be preferred by the two companies?

Additional Requirements

  • Written communication: Written communication is free of errors that detract from the overall message.
  • Length: 4–5 pages.
  • Font and font size: New Times Roman, 12-point.

Competencies Measured

By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:

  • Competency 2: Assess the background, practice, and methods of conducting an audit.
    • Analyze ways to evaluate open source shopping cart systems.
    • Design a system to detect customer theft in a restaurant.
    • Analyze the optimal role for detection in a restaurant setting.
    • Evaluate steps taken in the investigation of an employee suspected of wrongdoing.
    • Evaluate internal control processes related to credit approvals, bill payment, collections, and bank deposits for a small business.
  • Competency 3: Examine various types of forensic and non-forensic audits.
    • Evaluate how open source affects the security of shopping cart systems.
  • Competency 5: Communicate in a manner that is professional and consistent with expectations for professionals in the field of accounting.
    • Communicate in a manner that is professional and consistent with expectations for professionals in the field of accounting.

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