Financial Statement Fraud Investigation There have been complaints that the Best Services Corporation (hereaer referred to as the company) may have manipulated and misrepresented its nancial data. You have been hired as a fraud examiner to identify anomalies and detect possible fraud occurring in the company. Your rm has provided you some structure with respect to the analysis you are to perform. The company is a service company and became publicly-traded in 20X2. The attached data are excerpted from the company's 10K lings with the SEC (Securities and Exchange Commission). The company's nancial data from the 10K lings with the SEC (Securities and Exchange Commission) are shown in Appendix 1. Data and Templates are provided in Appendix 2. You are required to download Excel Spreadsheets (see Supplementary Material File that contains Appendices 1 & 2). After reviewing the primary nancial data, your rm has asked you to carry out analytical procedures as noted in the Case Assignment Requirements. CASE ASSIGNMENT REQUIREMENTS 1. Perform vertical (within the year) and horizontal analysis (year-toyear changes) of both the income statement (See Appendix 2, Table l) and the balance sheet (See Appendix 2 Table 2) for the Company. Input your formulas in the provided Tables using Excel Spreadsheets (lpts). Based on your analysis, what account(s) appear unusual? What fraud scheme(s) might cause this activity? (10 pts.) 2. Perform the following Ratios for the company from 20x2 to 20X6 (See Appendix 2, Table 3). Input your formulas in Table 3 in Excel Spreadsheet (16 pts.). Comment on your ndings particularly with respect to any anomalies (10 pts.). Gross Margin Net Prot Margin Asset Turnover Accounts Receivable Turnover Working capital Current Ratio Quick Ratio Debt Ratio (Debt to Asset) FQWWUOW? 3. Perform Beneish M-Score ratios (See Appendix 2, Table 4). Input your formulas in the provided Excel Spreadsheet (24 pts.). Based on the M-Score results, indicate in which year(s) fraud might have occurred (4 pts.). 4. Based on your ratio and M-score results, indicate in which year(s) fraud might have occurred, and provide explanations to support your conclusion(s) (5 pts). 5. Based on your ndings, what follow-on step(s) would you recommend for further analysis/investigation (10 pts)? 6. Submission package is complete and professional (5 pts.) Appendix 1: Statements of Income M M M m M M Net sales 1,408,997 1,903,788 3,398,777 6,262,582 11,613,037 12,250,073 Cost of sales 1,132,148 1,318,603 2,727,424 3,874,442 4,312,779 3,867,373 Gross prot 276,849 585,185 671,353 2,388,140 7,300,258 8,382,700 Selling & Marketing 799,486 1,001,529 1,049,381 1,900,984 2,492,172 1,714,501 General & Admin expenses 3,317,128 3,257,546 3,804,200 6,467,306 7,537,444 7,539,311 R & D - - - 316,941 214,287 196,600 Total operating expenses 4,116,614 4,259,075 4,853,581 8,685,231 10,243,903 9,450,412 Operating income (loss) (3,839,765) (3,673,890) (4,182,228) (6,297,091) (2,943,645) (1,067,712) Other income (expense) Interest Income 67,768 53,835 137,253 159,461 57,256 - Interest expense (590,970) (397,674) (686,315) (940,410) (2,705,835) (1,320,934) Other 6,712 21,122 40,605 30,280 (7,952) 4,523 Write-off accrued license fees 283,500 Write-off Notes Receivable (500,000) (1,291,636) Finance related expense (2,286,075) Net income (Loss) 31 (4,356,255) $ (3,996,607) $ (4,407,185) $ (7,547,760) $ (5,600,176) $ (5,961,834) Basic & Diluted EPS (0.04) (0.04) (0.03) (0.04) (1.56) (0.86) Additional Information Depreciation & Amort. Expense 421,542 475,542 571,527 943 ,473 1,026,805 852,3 78 Appendix 1: Balance Sheet M M M M M ASSETS Current assets: Cash and cash equivalents 1,661,213 1,522,922 1,186,939 610,736 29,822 Accounts receivable, net 269,566 568,811 956,710 4,432,854 796,487 Prepaid expenses & Other assets 375,966 972,256 308,065 739,013 344,729 Notes receivable - related parties 37,500 Notes receivable 1,231,474 901,728 455,458 177,600 405,000 Total current assets 3,538,219 4,003,217 2,907,172 5,960,203 1,576,038 Property, plant, and equipment, net 1,301,468 2,475,080 3,000,651 2,603,483 1,941,750 Security deposits 97,748 - - - 1,877,614 Notes receivable - related parties 9,722 Other Assets 735,& M 180 646 M Total Assets $ 4,947,157 $ 7,214,166 $ 7,203,201 $ 8,744,332 $ 5,670,815 LIABILITIES AND STOCKHOLDERS EQUITY Current liabilities: Accounts payable 1,177,014 1,222,801 2,032,557 1,858,486 1,910,665 Accrued expenses 433,942 458,452 232,169 222,633 2,549,593 Notes payable 293,900 1,671,819 1,518,739 2,720,006 153,221 Notes payable - related party 211,867 250,000 - - - Deferred Revenue 124,459 100,349 58,244 78,3 87 28,657 Current portion of capital lease 142,172 934,594 597,933 187,155 46,966 Convertible notes payable 10,000 10,000 1 383 440 -_ 1,474,775 Total current liabilities 2,393,354 4,648,015 5,823,082 5,066,667 6,163,877 Long-term notes payable - 225,509 206,576 16,145 10,129 Convertible notes payable - - 2165793 - - Capital lease - long term 202,222 336,158 231,358 46,691 -_ Total liabilities 2,595,576 5,209,682 8,426,809 5,129,503 6,174,006 Stockholders' equity Capital Stock 20,634,583 24,694,671 29,014,339 39,452,952 41,296,766 Retained Earnings (Accum. Decits) (18,283,000) (22,690,187) (30,237,947) (35,83 8,123) (41,799,957) Total stockholders' equity 2,351,583 2,004,484 (1,223,608) 3.614.829 {503,191 1 Total liabilities and stockholders equity 8 4,947,159 $ 7,214,166 $ 7,203,201 $ 8,744,332 $ 5,670,815 4 Appendix 2 - Template Table 1: Statements of Income Horizontal Analysis* Vertical Analysis 20X2 20X3 20X4 20X5 20X6 20X1 20X2 20X3 20X4 20X5 20X6 Net sales Cost of sales Gross profit Selling & Marketing General & Admin expenses R & D Total operating expenses Operating income (loss) Other income (expense) Interest Income Interest expense Other Write-off accrued license fees Write-off Notes Receivable Finance related expense Net income (Loss) Basic & Diluted EPS Additional Information Depreciation & Amort. Expense Note to Students: Perform horizontal (year-to-year changes) analysis. For example: For 20X4 Horizontal Analysis = [(20X4 data - 20X3 data)/20X3 data]Appendix 2 Template Table 2: Balance Sheet Horizontal Analysis* Vertical Analysis m m M m M w w m 20$ M ASSETS Current assets: Cash and cash equivalents N/A Accounts receivable, net N/A Prepaid expenses & Other assets N/A Notes receivable - related parties N/A Notes receivable N/A Total current assets N/A Property, plant, and equipment, net N/A Security deposits N/A Notes receivable - related parties N/A Other Assets N/A Total Assets N/A LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable N/A Accrued expenses N/A Notes payable N/A Notes payable - related party N/A Deferred Revenue N/A Current portion of capital lease N/A Convertible notes payable N/A Total current liabilities N/A Long-term notes payable N/A Convertible notes payable N/A Capital lease - long term N/A Total liabilities N/A Stockholders' equity Capital Stock N/A Retained Earnings (Accum. Decits) N/A Total stockholders' equity N/A Total liabilities and stockholders' equity N/A Iote to Students: Perform horizontal (year-to-year changes) analysis. For example: For 20x4 Horizontal Analysis = [(20X4 data 20x3 data)/20X3 data] Appendix 2 Template Table 3: Ratios Gross Margin Gross prot/Sales Net Prot Margin Net income/ Sales Asset Turnover Sales/Total Assets (Using Ending Total Assets) Accounts Receivable Turnover Sales/Accounts Receivables (Using Ending A/R) Working capital Current assets - Current liabilities Current Ratio Current assets/ Current liabilities Quick Ratio Cash & Cash Equivalents + ST Investments + A/R/Gurent Liab. Debt Ratio (Debt to Assets) Total Liabilities/Total Assets A. B. C. D. E. F. G. H. Note: ST = Short-Term Appendix 2 - Template Table 4: M-Score Worksheet 20X2 20X3 20X4 20X5 20X6 Receivables/Net Sales (see Note 1) Gross profit/Sales 1-(Current assets + PP&E)/Total Assets Sales Revenue Depreciation/(Depreciation + Net PPE) Selling, General & Admin/Sales (see Note 2) Total Liabilities/Total Assets TATA score steps Changes in Current assets N/A Changes in Cash and cash equivalents N/A Changes in Current liabilities N/A Changes in Current portion of Long-Term Debt (See Note 3 & Note 4) N/A Depreciation & Amortization N/A Numerator N/A Total Assets N/A TATA Score N/A M-Score Ratios Formula WN - DSRI [(CY Receivables/CY Net Sales)]/[(PY Receivables/PY Net Sales)] N/A GMI [(PY Gross Margin/PY Sales)]/[(CY Gross Margin/CY Sales)] N/A AQI [1-(CY Current assets + CY PP&E)/CY Total Assets]/[1-(PY Current assets + PY PP&E)/PY Total Assets] N/A 4 SGI CY Sales/PY Sales N/A 5 DEPI [PY Depreciation/(PY Depreciation + PY Net PPE)]/[CY Depreciation/(CY Depreciation + CY Net PPE)] N/A 6 SGAI [(CY SG&A expense/CY Sales)]/[(PY SG&A expense/PY Sales)] (see Note 2) N/A 7 LVGI [(CY Total Liabilities/CY Total Assets)]/[(PY Total Liabilities/PY Total Assets)] N/A 8 TATA N/A M-Score N/A > -1.78? Input "Yes" or "No" > -1.78 N/A Fraud Occurring Based on M-Score? Indicate Yes/No N/A Denote: CY = t; PY = t-1; Where CY = Current Year and PY= Previous Year N/A = Do not need to calculate Note 1: Receivables = Accounts Receivables Note 2: Exclude R& D in the SG&A expense calculation Note 3: Exclude current portion of capital Lease in the Current Portion of Long-Term Debt calculations Note 4: Debt = Notes Payable 8