Forensic Accounting Case - Tallahassee BeanCounters

Ya

t

CA

WMNJDaA

ISSUES IN ACCOUNTING EDUCATION American Accounting AssociationVol. 25, No. 2 DOI: 10.2308/iace.2010.25.2.2792010pReturn of the Tallahassee BeanCounters:A Case in ForensicAccounting

Carol Callaway Dee and Cindy Durtschi

ABSTRACT: Your firm has been engaged to conduct a forensic investigation of theTallahassee BeanCounters TBC, a privately owned minor league baseball team inTallahassee, Florida. Team owner Franklin Kennedy has told employees that the auditis related to the mortgage TBC obtained for the recently constructed training facility.However, Mr. Kennedy tells you privately that the investigation is not due to loan re-quirements; rather, it is due to his concerns arising from an anonymous tip he receivedin the mail. The assignment requires you and your investigative team to 1 analyze thefinancial and background data provided; 2 brainstorm the possible ways in which afraud could be perpetrated and concealed within the organization; 3 determine theadditional information you need to confirm or disprove your suspicions; and 4 requestthis information from the appropriate party at TBC. When your investigation is complete,you will present your written results to the owner, including 1 who committed the fraud,2 how it was committed, 3 the economic impact of the fraud to TBC, and 4 thefinancial benefit your suspects received from committing the crime.

Keywords: fraud detection; forensic accounting; auditing; problem-based learning.

Data Availability: The authors are willing to share any data as well as Excel versionsof all student and teacher handouts. Please contact ProfessorDurtschi.

PART I: CASE MATERIALS INTRODUCTIONour firm has been hired to conduct a forensic investigation of the Tallahassee Bean-Counters TBC, a minor league baseball team in Tallahassee, Florida. TBC has neverbefore been audited. Franklin Kennedy, the teams owner, has told employees that the

udit is a requirement of the bank, which provided the mortgage loan for the recently completedraining facility. However, Mr. Kennedy privately tells your audit team that he received an anony-

arol Callaway Dee is an Associate Professor at University of Colorado Denver, and Cindy Durtschi is anssociate Professor at DePaul University

e thank Special Agent Joseph Cornwell, FBI now retired, and Anthony Carro, former Chief Investigator of theanhattan District Attorneys office for their input and review of the case. We also thank Robert Dosch University oforth Dakota, Thomas Buckhoff Georgia Southern University, William Hillison Florida State University, Kevan L.

ensen University of Oklahoma, Patricia Johnson Canisius College, Chih-Chen Lee Northern Illinois University,avid OBrien Pittsburg State University, and Susan Swanger Western Carolina University for helpful comments and

p. 279321ssistance in implementing early versions of this case. We also thank participants at the 2007 and 2009 Fraud and Forensicccounting Education Conferences held in Savannah and Atlanta, Georgia.

Published Online: April 2010

279

mc

r

c

e

a

SfgKe

c

tfTt

o

a

pfr

Pc

pMTts

280 Dee and Durtschi

IAous note below in the mail leading him to suspect that someone within the company isommitting fraud. The envelope, addressed to Mr. Kennedy, had a Tallahassee postmark and noeturn address. Because Mr. Kennedy lives in Boston, he has entrusted the running of this fran-hise to his long-time associate Phil Ackers. Mr. Kennedy had assumed that things were runningfficiently until the note arrived. TBC has no formal procedures to accommodate whistleblowersnd the employees of TBC are unaware of the true nature of your engagement.

Mr. Kennedy:I think there is something funny going on here at TBC. Numbers that do not add up, lots ofwhispers in the hallways and closed-door discussions have me suspicious. If I were you I wouldcheck it out.A long-time friend.The owner has asked you to focus your investigation on the last five months May through

eptember. This is the time period during which the training facility was constructed. As youamiliarize yourself with the company, you note that in addition to revenue from ticket sales, TBCenerates funds from parking, fundraising, and sales of concessions and game programs. Franklinennedy also gives TBC some start-up money at the beginning of the season to assist with

xpenses until the team starts earning revenue from games. He withdraws that money over theourse of the season. Operating expenses consist primarily of payroll, equipment bats, balls, etc.,eam travel, programs, and concession inventory. Any fees due to the baseball league, such asranchise fees, are paid by the Boston Sox Franklin Kennedys major league team on behalf ofBC. Payroll is processed by an outside service company. Other office expenses are similar to

hose of most small businesses.Student Handout SH 1 provides an organizational chart for TBC. Office manager Ben Hill

versees daily operations of the organization. Michelle Shelton provides support for managementnd handles most of the bookkeeping, including accounts payable, cash receipts, and equipmenturchase orders. Candace Candie Larson, receptionist, answers phones and compiles time sheetsor processing. Julie Roper, assistant to the president, assists with donor relations and is alsoesponsible for concessions ordering and inventory as well as accounts receivable collections.resident Phil Ackers oversees fundraising activities and supervised the building of TBCs newlyompleted training facility.

To familiarize yourself with TBC, you attend a night game and chat with some of the em-loyees. The three women who work in the ticket booth seem particularly eager to chat. Myrnayers, their supervisor, tells you the three women have worked together in the booth for 20 years.

heir husbands come to every game, and the six often socialize together as well. Myrna is happyo talk to you about the other TBC employees, especially those in the front office. Below is aummary of Myrnas opinions.

Company Overview: Things have changed a lot this last year. Mr. Ackers cut down on excessemployees, particularly some of the game-day employees because its expensive to build a newtraining facility. I dont mind because this new building is great. Its state-of-the-art and I hope itwill help us recruit and keep our players in shape. Weve had a great season this year, and all of theladies here would love to see that continue. A lot of people complained during the building becauseof the mess and there was some tension because Mr. Ackers was on us to be efficient and cutexpenses so we could qualify for a good rate on the mortgage loan, but we qualified and I think itwas worth it. Phil brought in food and drinks for all of us the day we got the loan and everythingwas set. It was a lot of fun.Phil Ackers Company President: Phils a nice guy; he oversees the fundraising, and seems toknow everyone everywhere. Thats probably because he was a professional ballplayer years ago.He was pretty tense during the building of the new training facility, but now that its completed,hes getting back to his old self. Hes really close to his family; in fact, he even hired his niece Juliessues in Accounting Education Volume 25, No. 2, 2010merican Accounting Association

yc

i

ts

ki

P

w

bht

1

Return of the Tallahassee BeanCounters: A Case in Forensic Accounting 281

IRoper to take the place of Terri Hughes who had been his assistant forever when she left to go takecare of her mother.Julie Roper Assistant to the President: Shes a great change from Terri Hughes, Mr. Ackersformer assistant. Terri guarded Mr. Ackers office to the point it was impossible to get hold of Mr.Ackers to ask even the simplest question. Anyway, Terris mother got sick and Terri left, then Mr.Ackers hired his niece, Julie. Like I said, shes a welcome change. She works very hard, even hastaken over some jobs that Terri wouldnt touch, like the ordering for concessions and group ticketsales. She also took over accounts receivable collections from Michelle, who was thrilled to get ridof that job.Tucker Johnson General Manager: The players love Tucker. He has an interesting coachingphilosophynever raises his voice to the players or uses foul language. Weve sent many playersup to the majors, so he still gets the job done even without the four-letter words. Tucker cant standpaperwork, so he has Sam do most of the ordering as well as taking care of all the equipment.Ben Hill Office Manager: Ben still thinks its 1979 and disco is king. He dresses like JohnTravolta in Saturday Night Fever and is always hitting on the women in the office. He has severalex-wives; most of whom he started dating while still married to a previous one. When TBCqualified for its bank loan, Ben got a nice bonus which he blew on a new car. He calls it his chickmagnet. He keeps things running smoothly in the office though, so Mr. Ackers pretty much letshim run day-to-day operations however he wants.Candace Larson Receptionist: Candie is a sweet young girl. Shes good with the phones, andeveryone likes her. Shes the reigning Queen of the Taylor County Crab Festival. We were all realproud when she won. Shes always at the practice field after worksometimes I think shes moreinterested in dating players than in doing her job, but overall shes a good worker.Michelle Shelton A/P Clerk: Michelle is really hard working. She handles all the bookkeeping andpaperwork, like the purchase orders and stuff. Shes also going to school part time.To begin your audit, your team does a walk-through of each process at TBC. SH 2 describes

our observations of those processes and how employees handle their responsibilities. You alsoollect a copy of the team game schedule SH 3 and copies of the last five months of financialnformation SH 4 through SH 17.

ASSIGNMENTYour instructor will divide the class into teams. Working with your team, your assignment is

o determine whether fraud has been committed at TBC, and, if so, to gather and present evidenceufficient to prove the guilt of the suspects. This is a competitive exercise. It is essential that youeep the information that your team has gathered private. Leaks provide other teams with cheapnformation, and will put your team at a disadvantage at the time of grading.

rocedureThe first step is to review the background and financial information provided. Then, working

ith your team, brainstorm.1 Given the company, its employees, and processes, how could a fraude committed and concealed? Remember the fraud triangle: to commit fraud, a perpetrator mustave pressure, opportunity, and a rationalization for his or her behavior AICPA, para. 33. Arehere weaknesses in controls that could be exploited by an unscrupulous employee? Which em-

Statement on Auditing Standards SAS No. 99 requires the audit team to brainstorm about how and where theybelieve the entitys financial statements might be susceptible to material misstatement due to fraud, how managementcould perpetrate and conceal fraudulent financial reporting, and how assets of the entity could be misappropriatedAICPA 2002, para. 14. Generally SAS No. 99 does not apply to forensic investigators unless they are certified publicaccountants engaged to render an opinion on financial statements.ssues in Accounting Education Volume 25, No. 2, 2010American Accounting Association

pfio

ic

tTr

s

Tgibo

Ye

I

s

c

dc

t

F

c


IAloyees have the incentive to do so? Review the given financial data. Do relationships betweennancial and non-financial information seem reasonable? Are there any unusual trends, postings,r transactions about which your group is curious?

As in a real audit or forensic investigation, your group is not provided, initially, with all thenformation needed to solve the case. Once your group has reviewed the materials provided andompleted your brainstorming session covering the questions listed above, compile a list of addi-ional information you would like to receive. You will request this information via your instructor.o obtain the additional information you need, send an email to your instructor, but address yourequest to the appropriate employee of TBC, or the appropriate outside party. For example,Michelle Shelton: Please provide us with copies of the phone invoices for May.

As this is a forensic investigative exercise, you have greater latitude than in most auditituations to gather information in any legal manner you see fit. For example, you can questionBC employees, their friends, relatives, and business associates. If you have enough evidence toive probable cause, you can obtain a subpoena from a judge enabling you to acquire privatenformation such as credit reports or bank accounts. If requesting evidence from outside of TBC,e clear in your request. For example, If I examine public records, what will I learn about carswned by Sam McCarty? or If I attend the TBC fundraising event on April 3, what will I see?ou can also conduct other information gathering exercisesfor example, surveillance of TBCmployees.

nterviewing SuspectsIf time allows, your instructor may provide your team an opportunity to interrogate your

uspects near the end of your work on the case. The goal of the interrogation is to obtain aonfession from your suspects. You can include any confessions you obtain as additional evi-ence in your final fraud report. You will question any suspects as a team, so think of ways youan use your team effectively. The interviews are generally short 10 to 20 minutes, so considerhe following:

1. Be prepared. The more information you have gathered toward solving the case, the higherthe likelihood you can induce an admission of guilt from your suspect. For example, ifyou know who did it, how they did it, why they did it, and can show that they benefitedfrom the crime, you can box your suspects into a corner and obtain a confession.

2. Have a plan. Organize your information and decide on a method of presentation that willbest demonstrate to the perpetrator that denial of guilt is futile. However, do not treatyour pre-planned questions as a script to which you must adhere. You will want to modifyyour approach as the interview progresses based upon the responses of the suspect.

3. Have a theme for your interview. How will you behave toward the suspect? Will you beempathetic and understanding, allowing the suspect to rationalize his or her behavior? Orwill you act as if resistance to questioning is fruitless, as you have all the information youneed and are just letting the suspect state his or her side? Will you team up to playgood-cop, bad-cop? Make certain that all members of your team are using the sameline of reasoning.

inal Fraud ReportYour team will be graded based upon your written final fraud report. Your report should be

onvincing and include the following for each fraud your group uncovers:

1. The names of the perpetrators of the crime.2. How the perpetrators committed the fraud.3. The dollar magnitude of the fraud.ssues in Accounting Education Volume 25, No. 2, 2010merican Accounting Association

Ts

fta


I4. The personal gain received by the perpetrators from the fraud.In your report, you should include evidence to back up your assertions in the four areas above.

his evidence might include documentation you have gathered from your emails, informationummarized from interviews and other sources such as surveillance, and analysis based on datarom the student handouts. Finally, experience has shown that the most successful teams are thosehat work together. Each team members point of view is valuable. Divide this case and worklone, at your own peril.ssues in Accounting Education Volume 25, No. 2, 2010American Accounting Association


IA

ssues in Accounting Education Volume 25, No. 2, 2010merican Accounting Association


Issues in Accounting Education Volume 25, No. 2, 2010American Accounting Association


IA


Documents

Forensic Accounting Case - Tallahassee BeanCounters