ACME Construction Company

Forensic Investigation Skills

Introduction

Financial $$irregularities$$ often arise in closely$-$held businesses. When the majority shareholder controls

the accounting records, employs family members, and conducts all legal and accounting transactions,

opportunities are abundant for self$-$dealing and breach of fiduciary duty.

Students are placed in the role of an accountant working with a small, closely$-$held business in tax

and financial statement preparation. A client, a minority shareholder in a construction company, engages

the accountant after the majority shareholder states that cash flow is weak, salaries must be reduced, and

shareholders must make cash contributions to maintain liquidity. The client expresses concerns about the

cash flow situation due to his knowledge and experience with recent collections of large accounts

receivable, which is contrary to the majority shareholder$$s claims.

The case addresses issues regarding the widespread problem of shareholder fraud within a

closely$-$held business. The student is required to determine an appropriate course of action, including the

acquisition of corporate records withheld from the minority shareholder, analysis of records, potential

coordination with forensic accountants, legal issues related to the discovery of personal expenses paid by

the company, and failure to properly comply with associated laws. The client to date has only seen his

personal K$-1.$ Financial statements, Form $1120$S tax returns, and other financial information have not been

shared. The minority shareholder expresses concerns with what appears to be corporate self$-$dealing,

including company vehicles for office personnel, excess rent paid for property owned by the majority

shareholder, family member employment, and several expenses that appear personal in nature.

ACME Construction Company Facts

The client, Bob Mitchell, is a minority shareholder in a closely$-$held construction company, ACME

Construction. Annually, you prepare Bob$$s individual return, which includes a K$-1$ from his company$$s

Form $1120$S$.$ You have no responsibilities related to ACME Construction, and you have never seen any

records other than the annual K$-1$ and the W$-2$ Bob receives as an ACME employee. Aside from the

preparation of his individual return, you have not been involved in Bob$$s financial affairs.

Bob sets up an appointment with you to discuss a recent situation with his company. Bob tells

you that all shareholders in the company are related parties except for himself, and he was asked to join

as an investor due to his extensive experience and sales base. When you talk to him before the

appointment, he says that the majority shareholder called a meeting recently, requesting a $$10,000$

contribution from each shareholder, indicating extensive cash flow problems and an inability to

meet payroll requirements. He expresses extreme doubt as he knows sales are strong, and to his

knowledge, there are no large receivables outstanding.

Bob is responsible for company sales and operations. Family members, both shareholders and

nonshareholders, conduct administrative and business matters including accounting and legal dealings.

Bob has limited experience with the administrative side of the business, and after ten years he has

stayed out of any management issues. According to Bob, any requests for financial information

were discouraged by the majority shareholder$/$president of the company. You ask him to provide

you with prior years$$ financial information including tax returns and financial statements.

When Bob arrives for his appointment, he doesn$$t have any of the information requested. His

request to the majority shareholders was denied, and he was told that his job was to $$manage the

construction sites, not the company business.$$ Given the harsh tone of this statement, you ask

further questions about suspicious activity. Bob tells you that the majority shareholders consist of

four family members owning eighty$-$five percent. Bob$$s share is fifteen percent. The majority

shareholder who serves as president of ACME is employed full$-$time elsewhere, but his immediate

family members run office operations. His wife, one of the shareholders, is $$CFO$.$

Specific details from Bob include the following:

$$ Most of the office employees are family members:

o The majority shareholders$$ parents are employed, as well as the majority shareholders$$

college$-$aged children $($during their holiday breaks and summer$).$

o Family members work inconsistently throughout the week, and Bob has observed that

personal chores are frequently performed at the office during business hours.

o The majority shareholder, employed full$-$time at another company, draws a rather large

salary, explaining to Bob that he works in ACME management as needed during the day, and

also during the evenings and each weekend.

$$ Family member employees each appear to have received a cell phone and automobile