Cost Accounting for Contract Types

Review this case carefully and answer the questions at the end of the case in detail.

Jumbo Corporation had numerous Government contracts. The contractor's accounting system released the contracts to the shop by General Order (GO). There is no identification on the GO as to contract type. In this case, GO-1 is a fixed price contract. GO-2 is a cost type contract. Under Jumbo's system, Frank the shop foreman had the responsibility to tell shop employees which GO to charge their time. After awhile, Frank observed that when his employees charged more time to GO-2, and less to GO-1, he had much less complaints from management at monthly performance reviews. He notices the pattern, and it pleased him. He knew that some fixed price contract costs were being charged to cost type contracts. That made more profit for Jumbo. As V.P. Controller, Harold certified and submitted all invoices to the Government for payment. This pattern went on for some time.

Questions.

1. Is this fraud? Why or why not?

2. Is Frank guilty of Fraud? Why or why not?

3. Is Harold guilty of fraud? Why or why not?