Forensic Accuonting Book 2nd edition Joe Frecaso was recently hired as the contr
ID: 2813968 • Letter: F
Question
Forensic Accuonting Book 2nd edition
Joe Frecaso was recently hired as the controller for Larson Cement Company after the
previous controller was killed in a boating accident in Biscayne Bay. That controller
had been with the company since it first opened its doors. Joe spends most of his time
in the back office that has a panoramic view of “the yard” where the company trucks
constantly come and go throughout the day.
Larson is a privately held company owned by the same family for 40 years. The company
delivers concrete to construction sites throughout Miami/Dade County area.
Frank Larson, the son of the original CEO, runs the company. Joe and his two staff
accountants; Betty Ladrone, the treasurer; and her three staff members support the
company’s operations. There is also a secretary, front-office staff of three, an operations
supervisor, and a sales staff of seven.
Larson Company normally sells to most contractors on credit. Betty supervises the
credit approvals and reviews and handles bill payments, collections, and the bank
accounts. Joe has responsibility for the bank reconciliations, accounts receivables, and
the accounting records in general including the financial reports.
This morning the company secretary thumbed through the incoming mail as was her
custom. There was a stack of about 30 envelopes, many of them obviously containing
checks from customers paying on their accounts. She mentally prepared herself to
separate the envelopes into several different piles. She would route each pile to the
appropriate person: Frank, Joe, Betty, and Sara Martillo, the head of sales.
One envelope caught her eye. It was from the bank, but it wasn’t thick enough to be a
bank statement. In fact, after feeling the letter, she concluded that it contained only a
single page inside, part of which she tried to see through the small clear window on the
front of the envelope that revealed the company’s name and address.
She looked almost sideways through the envelope’s window to get a better look. There
was a message in red letters, but because of the angle, she couldn’t read what it said.
That was enough, however, for her to make a decision: The letter should go straight to
Frank. He had given her strict instructions to route any unusual-looking mail directly
to him.
About the time that the unusual looking enveloped arrived on Frank’s desk, Joe was
pouring over last month’s combined bank statement. It was out of balance by $1,104.35.
He just scratched his head, sighed, took a sip of his coffee, and remembered that the
current month’s bank statement had just arrived and was sitting unopened, propped up
against his computer monitor. Then the phone rang. It was Frank calling.
“I want to know what’s going on,” said Frank in an almost accusatory voice. “Our
operations bank account is overdrawn by some $14,000!
Frank was pretty sharp when it came to financial matters. His education included an
MBA degree with an accounting concentration, and he had worked as the controller of
Larson Cement when he was younger.
Within seconds after Joe hung up the phone, Frank appeared in his doorway looking
angry. “I want the bank statements right now.”
Joe tried to maintain his professional demeanor, but his chest tightened. “Don’t look at
me,” he said. “I don’t write the checks.”
Frank returned to his office, opened the current month’s combined bank statement,
and began thumbing through canceled checks. He stopped at one check for $2,500
paid to a Mary Waters. “Mary Waters, who are you?” he mumbled to himself.
Cases
218 Part II Fraud Examination Theory, Practice, and Methods
Frank was a hands-on CEO and knew all of the company’s vendors, and he had never
heard of Mary Waters before. He looked at the endorsement on the back of the check.
The checked had been deposited into a New York bank account.
Nervously, Frank spread the checks out on the table. Right away, several other checks
paid to Mary Waters popped out and stared at him. Now was is sure that something
was wrong: No vendor is paid more than once a month. So, he grabbed the phone and
called Joe again.
Joe answered on the first ring. In a thundering voice, Frank said, “Joe, we’ve got a
problem.”
Joe remained quiet and waited for what seemed like a long time and became more
nervous because it appeared that he was supposed to know what the problem was.
“That’s not a good sign,” he thought.
Frank pounded Joe with questions about Mary Waters.
“We’ll call Betty,” Joe finally said. “She’s the one with the checkbook.”
“No,” said Frank. “I want you to do a complete audit of her office, and I want a hidden
video camera set up in a position to record everything she does at her desk.”
“But what if someone else in her office stole the checks?”
“That’s not possible,” replied Frank. “She keeps the checkbooks locked up at all times
in her safe, and she’s the only one besides me with the combination.”
“Ok, I’ll start the investigation.”
a. Evaluate how well Frank and Joe have handled the problem.
b. Evaluate Larson Cement’s internal control processes as they apply to this case.
Explanation / Answer
a. ANS)
Frank Larson, the son of original CEO who now is responsible for running the Larson Cement Company and Joe Frecaso the newly appointed controller of the company must be applauded for handling the problem exceptionally well.
INDIVIDUAL CONTRIBUTIONS
FRANK - Frank did just the right thing by appointing Joe to take care of the fraud going on in the bill payments systsem. Had frank approached betty without any proof directly for the issue and if she really is the culprit she would possibly steped out and drag the blame on someone else or might have run off the situataion. Or in the other case if she was not the real culprit would be disheartened with the false allegations after providing continued support for the company and the company could loose on a very good employee and , the one actually responsible for the situation would be alarmed or attentive that fraud has been detected and could run off.
By conducting an audit and installing a hidden camera Frank will be able to get hold on the real culprit faster and would save the company from crisis and set an example for other employees that fraud has zero tolerance in the company.
JOE - Joe was very supportive to Frank in the whole sitution by following Frank's orders as told. Joe could as well take the benefit of the situation by informing the culprit and earning some extra dollars in return. Joe proved himself as a trustable employee.
b. ANS)
Internal Control Processes of Larsosn Cement Company.
Pros-
1)Appropriate number of employees. Each head of the department supported by a team of employees enabling decentralisation and efficient working of the deparments.
2)Classifying and routing the envelopes received to appropriate person responsible for. Helps in faster updation of any situation and decision making. Saves time and effort.
3) Any unusual looking mail directly goes to Frank so the company is alarmed by any possible troublesome situation ahead.
4) Monthly statements of the company reviewed monthly by the CEO and timely action taken to improve the performance of the company.
5) Vendors being paid once a month to avoid any possible confusions.
CONS-
1) External Auditor not appointed for performing timely audits for the company and report any discrepencies if any without being baised.
2) Cameras not installed to check the moment of the employees.