Description

You decide to interview Ronald Black, the owner of Black IPS. He brings in Russell O’Neill
who was their sales representative to JMC. He indicated that they no longer did business with
JMC. They had had a long standing relationship with them, but when Jim Miller retired, they
started doing less and less business with JMC. Mr. Black tried to salvage the account, but couldn’t.
He had some suspicions about it, but didn’t feel comfortable telling you. After a bit of prodding, he
tells you that he felt that Brackens was trying to shake them down. O’Neill had come to Black
sometime in 2001 and said that Brackens had hit him for making some kind of arrangement
between him (O’Neill) and Brackens. Brackens would make sure that business would come his
way if there some real good reason to do so. O’Neill told him that he would give him really good
prices and service, but that was all he could do. He was already giving JMC discounts, but that was
far as he could go. When Brackens told him he was missing the point, O’Neill said he would have
to get back with him. Brackens told him to forget it. After that, JMC started giving more and more
business to other vendors. O’Neill had heard that there were some vendors in town who didn’t have
the best reputation. They were brothers and located on Lamar. He didn’t feel comfortable telling
you anything else. When you asked him about Angela Harkins, he said that he had had lunch with
her and Brackens once or twice, but he didn’t know too much about her.

Questions:
1. Based on this information, do you have enough to terminate Brackens? Why or why not.

2. Who else do you suspect at this time? Why or why not?

3. What is your next move?

Practical Problem 7

4. Who would you next interview?

5. What questions would you ask?

You pull the vendor agreements for the vendors selected (which are found on the following
pages). Some of the vendors have long standing relationships with JMC while others have been
fairly new. You also pull a sample of the requisitions and can find all of them except for the ones
for Lantern Co. You then go to accounts payable and match the requisitions that you found in
purchasing with the invoices that have been paid for each vendor. The invoices you have pulled
contain the required paperwork and have the proper authorizations, even for Lantern.
While in accounts payable you start talking with one of the accounting clerks, Beth Ann, who
tells you that Mr. Brackens is a very demanding manager and is very big on providing prompt
payment to the vendors. In fact, for one vendor whom he says is very picky, he has to pick up
their checks and personally deliver them. Beth Ann recalls that the account is Lantern Co. For a
couple other accounts, he wants to know every month when their checks go out. He says he’s
having to monitor them since they are fairly new. He used to do that for some other accounts, but
not any more. Although she couldn’t remember the ones that he doesn’t ask for any more, he
does keep an eye on Top Q and Blues Pro. This is probably a good thing, since we pay them
more than others. You pull the checks and they have all been deposited into the vendor’s
checking accounts.
Questions:
1. Is there fraud? Why or why not?

2. Will you expand your audit? How?

3. Do you have predication for a fraud examination? Why or why not?

4. What fraud schemes could be occurring?

Practical Problem 4

5. Who do you suspect? Why?

6. Who don’t you suspect? Why?

7. What are your next steps?

 

You are K.C. Barton, a new auditor in the Internal Audit department of Jenkins
Manufacturing Company. Jenkins Manufacturing Company (JMC) has been in business for more
than forty years in central Texas and is a publicly traded company with ten subsidiaries. The
company manufactures parts for computers, having jumped into the computer business when it
was in its infancy back in the 60s. The Jenkins family still owns the majority stock of the
company. The company has 12,000 employees that are spread all over the United States,
Canada, Mexico, and Scotland in seven offices. The business has been solid for most of its forty
years, and although it has had slowdowns during recessions, there have been very few times
when the company had to lay off employees.
The company’s chairman of the board is James Jenkins, son of founder John Jenkins. The
Vice-Chairman of the Board is Jenny Jenkins Roberts, daughter of John Jenkins. Other senior
executives are not members of the Jenkins family, but have been with the company, on average,
20 years. The company prefers to promote from within and offers stock options to all employees
no matter what level they are.
In order to become familiar with the audits that are conducted by the department, you have
been reviewing working papers for previous audits. You note that two years ago, an audit was
conducted of the purchasing function of a small division of the company in which the purchasing
director, Thomas Brackens was extremely uncooperative. While that might be a fairly common
occurrence in audits, this audit was never completed. There is a notation in the file that the CEO
of the company asked the department to conduct another audit of an area that had been having
serious problems as soon as possible, which required all resources to be pulled to complete the
CEO’s request. The internal audit department had planned to finish the audit but never did. The
auditors who worked on the purchasing audit have since left the company as has the internal audit
manager. There were some notations that the auditors were having trouble locating some
invoices and requisitions that had been selected for audit and that there were some purchases that
looked like that had been split. A previous audit of the area was conducted without any major
findings noted. In fact, there is a memo in the file from Jim Miller, the former director of
purchasing (now retired) who thanked the internal audit for their assistance and that he would
implement their recommendations immediately.
You decide that it is time to look back into this situation. There are too many red flags that
say something isn’t right. You bring it up to your manager who says to go ahead and check it out,
but that if it’s going to take more than 100 hours, you would need to let her know.

Questions:
1. What red flags do you see that are troublesome?

Practical Problem 1

©2004 Association of Certified Fraud Examiners

Conducting Internal Investigations – US Page 2 Revised: 05/05/04
2. What types of fraud could be occurring?

3. How would you check out this situation?

4. How would you approach Mr. Brackens?

5. Develop an action plan.

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