Posted: September 21st, 2015

Accounting Fraud.

In 2005, the external auditor of Anasazi Corporation discovered three major frauds. The first was a $4 million theft of inventory that had been going for six years. The second was a $3 million kickback scheme involving the most senior purchasing staff. This senior purchasing staff had been allowing certain customers to overcharge for products in return for personal payments and other financial favors. The third was an overstatement of receivables and inventories by a subsidiary manager to enhanced reported earnings. Without the overstatement, his unit’s profit would have fallen far short of budget. The amount of overstatement has yet to be determined. All three of these frauds were reported in the financial newspapers and have been embarrassing to the company.

In response to these incidents, Anasazi’s Board of Directors demanded that management take “positive steps to eliminate future fraud occurrences.” In their words, they are “sick and tired of significant hits to the bottom line and negative exposure in the press.” Assume the management hired you, an accounting fraud examiner, to develop a comprehensive program to prevent future fraud in Anazazi.

Required

In developing your comprehensive fraud prevention program, describe clearly the roles the following Anasazi’s personnel will play in the program Refer to the various recommendations and guidelines on fraud prevention discussed in Chapter 3 and use the format below. An entry is made in the first row as an example to help you complete the rest.

• Note: Your answer must include at least 1 role for each of the above 6 personnel.

SQ3-4)

How to Set Up a Whistleblowing Hotline to Prevent Fraud?

Wemade is a small publicly traded manufacturing company. Because of its small size, it is not cost effective to have internal control on proper separation of duties throughout the company. As a result, management knows that opportunities exist to perpetrate fraud within the company. Management is particularly concerned with possible collusion between purchasing officers and venders because of the relatively small size of the company and the fact that a single purchasing officer is often solely responsible for a vender’s account with regard to purchases of raw materials. Management figures that a lot of money could be saved by proactively preventing fraud and not just acting on a reactionary or crisis mode. As such, management considers establishing a whistleblowing hotline where employees can report suspicious activity.

Required

1. Assume you are on the audit committee of Wemade manufacturing company. You are well aware that a whistleblowing hotline is now the statutory responsibility of the audit committee and cannot simply be delefated to the company’s management. Also, you are well aware that Section 301 of the Sarbanes-Oxley Act of 2002 requires that audit committees establish effective whistleblowing procedures, a statutory resposibillity that they did not have before. You are to call a meeting of the audit committee to discuss how to set up an effective whistleblowing hotline for the company. You have identified 3 key issues for the audit committee to consider. For each of these 3 key issues, list 3 questions that you would raise during the meeting. Use the format below, adding rows as needed. An entry is made in the first row to help you complete the rest.

2. During the meeting, members of the audit committee may ask you about whistleblower laws and rights. To prepare for your answers, first, go to the Cornell University Law School website and read the Protection for Employees of Publicly Traded Companies Who Provide Evidence of Fraud under Chapter 73 of Title 18, United States Code, Section 1514A

https://www.law.cornell.edu/uscode/text/18/1514A

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