Fraud Investigation: Lakes Inc.

Facts

            From the highlighted case study, there are several facts that come out clearly and play a focal role in determining the guilty parties in the fraud scenario. First, though the tip about the fraudulent activity at Lakes Inc. came two years prior to the investigation (June 2007), it was credible. The tipster had rightly noted that an employee was submitting false expense claims and their information that a HD television had been purchased in place of a computer server checked out.  The company had lost money in the region of $8,795.60 through false invoices submitted via the purchasing department.

            It was also a fact that the main suspects of the crime were the associate director of purchasing, Mr. Smith and his administrative assistant, Ms. Bad. It was the former’s corporate purchased card that had been used to purchase the HD television and additional items by Ms. Bad, including a home theatre, a digital camcorder, a GPS system and a notebook computer. Additionally, Smith made an unorthodox request to have purchases held for pickup only by him or his administrative assistant. Ms. Bad on her part was suspicious on three accounts. First, she made three additional purchases using Mr. Smith’s card without his authorization. Secondly, she did not keep proper records of purchases, filing copies of invoices rather than the originals. When crosschecked with the supplier, the invoice numbers, dates and amounts were correct but the invoices misrepresented what was bought. Thirdly, in the physical assets database that she maintained, the purported server that was bought could not be traced and no ID card had been issued for a similar item in the last 10 months. This was despite filing an invoice copy of the same. There should have been a corresponding record of the HD television or server if her records were accurately placed for non-disposable assets.

            Sterns, an approved supplier appeared non-complicit to the fraud. They offered unwavering support to the investigation and backed their statements with original invoices, specific dates and their gut feelings towards the conduct of Ms. Bad and Mr. Smith. However, the manager, Mr. Ted Jones clearly did not report to Lakes Inc. that Smith and Bad were engaging in rather unprofessional purchasing requests. This still does not prove any involvement.

Analysis

            It was apparent that the fraud committed in the company was internal. Asset misappropriation can be carried out by the employees of an organization or their vendors (Peterson & Zikmund, 2004). In some cases, there is complicity on both sides. However, it was clear that this was purely internal given that if the vendor, Sterns, was involved, then the manager would have not offered information that can be used to incriminate Smith and Bad. On the other hand, if Ted Jones or anyone from Sterns was entirely to blame for the fraud, the records kept by Ms. Bad would have nabbed them and Mr. Smith’s card would have not been used in the first place. This narrows down the fraud detection exercise to the purchasing department and particularly on Bad and Smith.

            The type of fraud that had been committed in this case was expense reimbursements. This refers to the false claims of business expense that had not been incurred (Wells, 2008). Examples included the server which had not been bought and instead had been replaced by a HD television. Others entail the items that were bought from Sterns but had been misrepresented in Lakes Inc.’s records. Normally, such crimes are committed by the employees of an organization from the purchasing department, given that they hold the exclusive power of claiming reimbursements (Pedneault et al., 2012). The critical question was whether the architect of the fraud was Ms. Bad, Mr. Smith or a collusion of both. There is a huge possibility that Mr. Smith was innocent. First, there is no direct link between him and the asset misappropriation, save for the fact that he requested that he picked up his purchase on his own or through Ms. Bad. Even then, it cannot be established if it was him who made the request or someone may have impersonated him. There was a possibility that Mr. Smith was a victim of Ms. Bad’s impersonation, given that she had used his card to make three additional purchases without Smith’s approval. Additionally, Mr. Smith would be incriminating himself by allowing his own card to be used to make fraudulent dealings which does not make sense.

            Classic fraud theory has laid out a clear framework of understanding the motive of asset misappropriation. It states that perpetrators must be facing some perceived pressure such as financial need, have perceived opportunity to commit fraud and can find a way to justify their actions as acceptable (Albrecht, Kranacher & Albrecht, 2008). In this case, Ms. Bad may have experienced pressure to stock her house given that she purchased a HD television, a home theatre, a digital camera and other items that fit in a household. She had the opportunity to commit fraud by manning the non-disposable items’ database and filing of invoices. Justifying her actions would be easy given that Mr. Smith would be blamed as it was his card in use – and she reported to him anyway. She could state that she was working under his orders.

Conclusion

Ms. Bad was the culprit in the fraud case. There was no motivation for Mr. Smith to commit the fraud and though he had the opportunity, he could not provide a rationale for using his own card to make fraudulent purchases. He was being framed.

References

Albrecht, C., Kranacher, M. J., & Albrecht, S. (2008). Asset misappropriation research white paper for the Institute for Fraud Prevention. Institute for Fraud Prevention, Research studies. Available from: http://www. theifp. org/research-grants/recentStudies. html (21/01/2013).

Pedneault, S., Silverstone, H., Rudewicz, F., & Sheetz, M. (2012). Forensic accounting and fraud investigation for non-experts. John Wiley & Sons.

Peterson, B. K., & Zikmund, P. E. (2004). 10 truths you need to know about fraud. Strategic Finance, 29-35.

Wells, J. T. (2008). Principles of fraud examination (pp. 277-90). Hoboken, NJ: Wiley.