A small manufacturing company employed in investment banking firm to help get its house in order. The firm was cash strapped and had been paying delinquent taxes. They had negotiated a plan with the IRS but we're about to default on that plan. The company was also financing its accounts receivable with a factoring company. However, they were experiencing a shrinking AR from an income and balance sheet viewpoint. The company, while struggling, appeared to have a chance to remain viable. You've been called into assess the company operationally. First, you discover that from an operations standpoint, it's products are substandard and many lots were rejected. The company would issue a credit to the customer and re-ship a replacement product. However, they are not recording the credits to AR and they were taking rejected materials and adding them back into inventory--not physically, but on the books. The owner, the plant manager, and the quality manager were all in on this deception.

a. What could've been done to prevent this deception?

b. Show what this deception looks like with both income and balance sheets with fraud intent, and what it should look like being honest. Assume 40% of the soul product was rejected. Show both for three months. Consider the factoring cost to be 8% and some 80% of the AR being factored.