Whodunit?
This case and solution were prepared by Karen Collins, Lehigh University
The following facts relate to an actual embezzlement case. Someone stole more than $40,000 from a small company in less than two months. Your job is to study the following facts, try to figure out who was responsible for the theft and how it was perpetrated, and (most important) suggest ways to prevent something like this from happening again.
Facts
Location of company: a small town on the eastern shore of Maryland. Type of company: crabmeat processor, selling crabmeat to restaurants located in Maryland. Characters in the story
- John Smith, president and stockholder (husband of Susan).
- Susan Smith, vice president and stockholder (wife of John).
- Tommy Smith, shipping manager (son of John and Susan).
• Debbie Jones, office worker. She began working part-time for the company six monthsbefore the theft. (At that time, she was a high school senior and was allowed to work afternoons through a school internship program.) Upon graduation from high school (several weeks before the theft was discovered), she began working full time. Although she is not a member of the family, the Smiths have been close friends with Debbie's parents for more than 10 years.
Accounting Records
All accounting records are maintained on a microcomputer. The software being used consists of the following modules:
a. A general ledger system, which keeps track of all balances in the general ledger accounts and produces a trial balance at the end of each month.
b. A purchases program, which keeps track of purchases and maintains detailed records of AP.
c. An accounts receivable program, which keeps track of sales and collections on accountand maintains individual detailed balances of accounts receivable.
d. A payroll program.
The modules are not integrated (that is, data are not transferred automatically between modules). At the end of the accounting period, summary information generated by the purchases, accounts receivable, and payroll programs must be entered into the general ledger program to update the accounts affected by these programs.
Sales
The crabmeat processing industry in this particular town was unusual in that selling prices for crabmeat were set at the beginning of the year and remained unchanged for the entire year. The company's customers, all restaurants located within 100 miles of the plant, ordered the same quantity of crabmeat each week. Because prices for the crabmeat remained the same all year and the quantity ordered was always the same, the weekly invoice to each customer was always for the same dollar amount.
Manual sales invoices were produced when orders were taken, although these manual invoices were not prenumbered. One copy of the manual invoice was attached to the order shipped to the customer. The other copy was used to enter the sales information into the computer.
When the customer received the order, the customer would send a check to the company for the amount of the invoice. Monthly bills were not sent to customers unless the customer was behind in payments (that is, did not make a payment for the invoiced amount each week).
Note:
The industry was unique in another way: many of the companies paid their workers with cash each week (rather than by check). It was, therefore, not unusual for companies to request large sums of cash from the local banks.
When Trouble Was Spotted
Shortly after the May 30 trial balance was run, Susan began analyzing the balances in the various accounts. The balance in the cash account agreed with the cash balance she obtained from a reconciliation of the company's bank account.
However, the balance in the accounts receivable control account in the general ledger did not agree with the total of the accounts receivable subsidiary ledger (which shows a detail of the balances owed by each customer). The difference was not very large, but the balances should be in 100 percent agreement.
At this point, Susan asked me if I would help her locate the problem. In reviewing the computerized accounts receivable subsidiary ledger, I noticed the following:
a. The summary totals from this report were not the totals that were entered into the general ledger program at month end. Different amounts had been entered. No one could explain why this had happened.
b. Some sheets in the computer listing had been ripped apart at the bottom. (In other words, the listing of the individual accounts receivable balances was not a continuous list but had been split at several points.)
c. When an adding machine tape of the individual account balances was run, the individualbalances did not add up to the total at the bottom of the report.
Susan concluded that the accounts receivable program was not running properly. My recommendation was that an effort be made to find out why the accounts receivable control account and the summary totals per the accounts receivable subsidiary ledger were not in agreement and why we were finding problems with the accounts receivable listing. Since the accounts receivable subsidiary and accounts receivable control account in the general ledger had been in agreement at the end of April, the effort should begin with the April ending balances for each customer by manually updating all of the accounts. The manually adjusted May 30 balances should then be compared with the computer-generated balances and any differences investigated.
After doing this, Susan and John found several differences. The largest difference was the following:
a. Did he receive this order?
b. Did he receive an invoice for it?
c. Did he pay for the order?
d. If so, did he have a copy of his canceled check?
Although John felt that this would be a waste of time, he called the customer. He received an affirmative answer to all of his questions. In addition, he found that the customer's check was stamped on the back not with the normally used "for deposit only" stamp of the company but with an address stamp giving only the company's name and city. When questioned, Debbie said that she sometimes used this stamp.
Right after this question, Debbie, who was sitting nearby at the computer, called Susan to the computer and showed her the customer's account. She said that the payment for $5,000was in fact recorded in the customer's account. I came over to the computer and looked at the account. The payments were listed like this:
Amount Date of Payment
$5,000 May 3
$5,000 May 17
5000 May 23
$5,000 May 10
I questioned the order of the payments-why was a check supposedly received on May10 entered in the computer after checks received on May 17 and 23? About 30 seconds later, the computer malfunctioned and the accounts receivable file was lost. Every effort to retrieve the file gave the message "file not found."
About five minutes later, Debbie presented Susan with a copy of a bank deposit ticket dated May 10 with several checks listed on it, including the check that the customer said had been sent to the company. The deposit ticket, however, was not stamped by the bank (which would have verified that the deposit had been received by the bank) and did not add up to the total at the bottom of the ticket (it was off by 20 cents).
At this point, being very suspicious, I gathered all documents I could and left the company to work on the problem at home, away from any potential suspects. I received a call from Susan about four hours later saying that she felt much better. She and Debbie had gone to Radio Shack (the maker of their computer program) and Radio Shack had confirmed Susan's conclusion that the computer program was malfunctioning. She and Debbie were planning to work all weekend reentering transactions into the computer. She said that everything looked fine and not to waste my time working on the problem.
I felt differently. How do you feel?
Answer the following questions in 3 to 4 page without being plagiarized and citing all the sources.
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?
b. Who do you think was the embezzler?
c. How was the embezzlement accomplished?
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.
e. Would the fact that the records were maintained on a microcomputer aid in this
embezzlement scheme?