Coker A. Sales (CA), a limited liability company, was a growth orientated company that was dominated by its managing director, Mr. Thief. The company sold quality music systems direct to the public. A large number of sales persons were employed on a commission only basis. The music systems were sent to the sales agents who then sold them direct to the public using telephone sales techniques. The music systems were supplied to the sales agents on a sale or return basis and CA Sales recognized the sale of the equipment when it was received by the sales agents. Any returns of the music systems were treated as re-purchases in the period concerned.

The company enjoyed a tremendous growth record. The main reasons for this apparent expansion were as follows.

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(a) Mr. Thief falsified the sales records. He created several fictitious sales agents who were responsible for 25% of the company's revenue. (b) At the year-end, Mr. Thief dispatched nearly all of his inventories of music systems to the sales agents and re-purchased those that they wished to return after the year-end. (c) 20% of the cost of sales was capitalized. This was achieved by the falsification of purchase invoices with the co-operation of the supplier company. Suppliers furnished the company with invoices for non-current assets but supplied music systems. (d) The directors of the company enjoyed a bonus plan linked to reported profits. Executives could earn bonuses ranging from 50% to 75% of their basic salaries. The directors did not query the unusually rapid growth of the company, and were unaware of the fraud perpetrated by Mr. Thief