ACCOUNT 777 Fraud from the Manager's Perspective Case Analysis 2 Jamie Davis, the ofce administrative assistant to the executive director (ED) at New Day Products (NDP), stared at the letter from the IRS in shock and disbelief. The letter asserted that NDP owed over a million dollars in back payroll taxes with associated interest and penalties. While Jamie suspected something amiss with how the ED managed the organization, she scarcely imagined things were this bad. Jamie wondered how this could happen at an organization with a mission of helping people. Organizational Background Founded in l975. NDP is a nonprot organization that provides employment and social services to people with disabilities in cooperation with private and public community organizations and businesses. At founding, NDP boasted a wellrounded board of directors consisting of 15 members with expertise in accounting legal, nancial, vocational, and social work. The executive director [ED], Dick Kaup. was experienced, dedicated, and believed in a highly transparent management style. He kept the board fully informed regarding all operational and financial matters. With detailed reports, the board monitored results against an annual budget and discussed signicant variances. The board oversaw internal controls, assuring no one person controlled an entire financial process from beginning to end. The treasurer reviewed Dick's NDP credit card statement every month to ensure all charges were reasonable and served legitimate business purposes. Regular board training included financial oversight, internal controls, and legal and ethics issues. Annual board selfevaluation enhanced board effectiveness. Staff members were similarly well-trained and adequately supervised. NDP's state's statutes do not require audits for nonprot organizations. and NDP was also not required to have a federal single audit. Dick believed periodic independent audits provided a necessary deep dive into the processes and documentation that supported the organization's nancial reporting. Compared to nancial statement audits that required more extensive procedures, nancial statement reviews would have been less costly because they rely primarily on analytical procedures and inquiries of management without looking at evidence to support the underlying transactions that comprise account balances. But Dick preferred the "deeper dive" and viewed audits as another signicant layer of scal oversight. By all accounts. the organization operated smoothly and efficiently under Dick's leadership. When Dick retired, Steve Clark became the new ED. One board member described the next ve years under Steve's directorship as "a period of complacency. We had been lulled into a sense of security knowing that Dick had done a wonderful job and the organization was on solid footing." While the board continued monthly meetings and biannual nancial statement audits, membership began to shrink. One left due to health problems, another retired and moved out of the area, and two others left because their own businesses were taking up more of their time. With fewer resources, a lack of expertise, and reduced focus, the board relaxed or abandoned altogether many of the board practices from the Dick Kaup era. Notably. the board discontinued regular board training sessions and selfevaluations. Amid these changes. rumors circulated that Steve was not as committed or adept as his predecessor. The nancial health of the organization showed signs of deteriorating. Staff turnover, historically quite low, began to increase. Nancy John, NDP's business manager1 regularly attended board meetings. She oversaw many of the organization's administrative functions, including its accounting, payroll, and budget processes. She also prepared and maintained the documents necessary to retain state government contracts and grant rnding, both signicant sources of organization revenues. Nancy was openly critical of Steve '5 leadership and some board members shared a similar sentiment. Two additional board members, including the treasurer, left the organization to pursue other opportunities, leaving the board with no nancial expertise and nine remaining members. Filling board vacancies proved difficult. A remaining board member recalled that "as folks left the board, we would make an initial attempt at replacing their area of expertise. but things would go on and we wouldn't nd a replacement." Having lost condence in Steve's ability to lead the organization, the board released Steve and appointed Nancy John as ED. ACCOUNT Tl\"? p. 2 Case Analysis 2 The Nancy John Years Nancy .Tohn could have been two different people. To the board, she was a hardworking, engaged manager who was "always in control" of a situation. But to the staff, she was an intimidating micromanager who ran things "close to the vest,\" never asked for input, and was quick to criticize, even punish, if things went unexpectedly. Immediately after assuming the ED position, Nancy eliminated the business manager position as a \"cost cutting move," combining her prior position as business manager with her new ED position. The change attened the organization so all managers reported directly to her. Upon becoming ED, Nancy also transferred responsibilities for accounts payable from Jamie Davis to Gail Hart. Jamie Davis had managed payables for several years and remained the ofce administrative assistant after the change. But for Gail, the change was more meaningful. Formerly a minimum wage employee with a GED but no signicant business knowledge or experience, Gail, unbeknownst to the board or other staff, became the secondhighestpaid staff member in the organization. Nancy made Gail responsible not only for accounts payable but accounts receivable, and she took it upon herself to personally train Gail in her new responsibilities. Gail'sjob was to accumulate bills and present them to Nancy for coding and approval. Gail then prepared the checks, which required two signatures including Na ncy's. To simplify the checksigning and accounts payable process, Nancy instructed Gail to order signature stamps that would allow Nancy to stamp checks with both required signatures. One ot'Nancy John's rules was that she was the only one allowed to open the mail. If she was gone for a day or two, the mail was placed on her desk, and she would open and route it when she returned. In addition to her tendency to micromanage business processes, Nancy was known by her associates for another trait. One manager recalled that "Nancy came in with a sense of entitlement. She basically kicked out the former ED by going to the board with a number of allegations and then initiated a series of perks for herself including the construction of a private restroom, gas cards to fuel her vehicle, and an expense account to cover the cost ofalmost daily 'business' meals." Nancy frequently treated friends to lunch and wine or dinner and drinks, charged to NDP's credit card. She hired her husband to construct a private bathroom near her ofce for which NDP paid over $40,000 in material and labor. When questioned about her spending habits, Nancy would attempt to placate the questioning staff with gifts such as expensive bottles of wine for jobs well done. If the questioning continued, she replaced the staff member. Nancy followed a similar approach for any staff who was critical of her performance or questioned her methods or policies. One staff member commented, "she didn't hesitate to tire someone if she felt that they were not loyal. She created an atmosphere where everyone was afraid of losing theirjob. Everyone was constantly looking over their shoulder." To conceal her spending habits, Nancy altered how NDP formatted its nancial reports. Prior to Nancy becoming ED, the board received annual budgets and detailed nancial statements. Nancy no longer provided detailed annual budgets and began abbreviating much of the previously provided information, including summarizing broad expense categories into a single line item. As the board no longer included financial experts, no one objected to the lack of budgets and diminished detail. Further, the board no longer included a treasurer. He departed two years earlier and had previously regularly reviewed the ED's credit card statement. The board met only once or twice a year for Nancy's updates. Board training and selfevaluation continued to be overlooked. After her second year as ED, Nancy explained to the board that the broader deterioration of NDP's nancial picture was due to decreased funding from federal and state sources. The board gave her the goahead to do what she needed to trim costs. With her new selfassigned cost reduction mandate, Nancy eliminated biannual audits in favor of biannual nancial statement reviews just months prior to when the rst audit would have been performed with Nancy as ED. Because neither state statutes nor any of the organization's funding sources required a full audit, or even a financial statement review, Nancy reasoned that a review would suffice and was still more than what was absolutely required; a review was nearly as good as an audit, she explained. but would be less expensive and less administratively burdensome. nCCOL'NT 7?\"? p. 3 Case Analysis 2 Additionally, Nancy eliminated most employees' benets, while preserving her family's health insurance. She also initiated personnel reductions, some of which were offset by questionable promotions and pay increases. For example, Nancy replaced the community services coordinator by promoting her daughter to the position. Because Nancy's daughter was promoted from within the department, the change eliminated her previous position. Much of those cost savings. however, were offset as Nancy's daughter received a new salary that was nearly 8|} percent higher than that of the previous coordinator. Similarly, other personnel reductions were partially offset when Nancy awarded herself an 11 percent pay raise. Nancy never consulted the board with these changes, and the abbreviated nancial reports combined with a lack of board member nancial expertise resulted in them not inquiring further. ANALYSIS REQUIREMENTS Identify and explain the fraud risk factors present at New Days Products. Be thorough and specic, with explicit details and supporting details from the case. While you do not have to categorize the fraud risk factors in terms of the 'aud triangle or 'aud diamond, you should use one of these models as a guide to ensure you are thoroughly considering all areas of potential fraud risk factors. GENERAL REQUIREMENTS Prepare a typewritten report of approximately 23 pages to address the analysis requirements. Your report should he in paragraph form with complete sentences, not a bullet point list of the fraud risk factors that you identify. Your report should exhibit professional language, grammar, and organization. Responses should reect application of critical thinking and logical analyses. Properly cite and provide a reference list for any outside sources, if appropriate (reference list does not count toward page count)