Forensic Accounting Case Study Series - sponsored by Deloitte FAS LLP and the Deloitte Foundation NWSupplies, Inc. Sales Fraud Case No. 1-3B Background An allegation recently surfaced against NWSupplies, Inc. ("The Company"), a supplier of office supplies and equipment, which claimed that management has been pushing their salesmen to close deals by quarter end with sales contracts allowing for weak return policies. Your colleagues at Zeus LLP ("Zeus"), a boutique orensic accounting firm located in Washington, D.C., have already started reviewing the allegation to see if it nas any merit. Thus far, the team has begun collecting hard drives, reviewing emails, requesting locumentation from the client, and analyzing financials. In doing so, they have identified a transaction which culd substantiate the allegation. The transaction occurred near the close of the 3rd quarter, with MDJ Sales - one of the company's largest retail purchasers. To date, the team has found the following support related o the sale to MDJ: 1. Emails (Appendix 1) - After utilizing Zeus's data keyword search tool, the team discovered a couple "Hot Doc" emails. The emails identified include 1) an email between the sales manager and salesman, and 2) an email thread between the controller and the CFO. 2. Journal Entry Screenshot (Appendix 2) - The team received access to the accounting system and located the journal entry for the MDJ transaction. 3. Sale Invoice (Appendix 3) - The team found a copy of the invoice for the sale in question with a sales date of 9/27/12. Known for your investigative skills, your Partner at Zeus has requested that you analyze the support found and prepare a report that includes the following: 1. Prepare an interview outline for a meeting with John Hunter, Chief Financial Officer of the company and include 10 questions you will want to ask Mr. Hunter. 2. What anomalies were detected during your review of the transaction documents? 3. Why would the actions taken by the NW Supplies sales team be considered fraud? Are there any circumstances under which similar actions may not be considered fraud? 4. Provide 3 suggestions on how the company can prevent this issue from reoccurring. 5. Name 3 benefits to effective interviewing and interrogation skills? From: Smith, Jack (JSmith@NWSupplies.com) [Divisional Sales Manager] Sent: Wednesday, September 19, 2012 4:23 PM To: Schwartz, Terry (TSchwartz@NWSupplies.com) [Salesman] Cc: Hunter, John (JHunter@NWSupplies.com) [Chief Financial Officer] Subject: Sales for 3rd Quarter Close Hey Terry - As you are aware, 3rd quarter closes next week and our sales figures are well below where we thought they would be. I think we should offer MDJ Retailers a 30% discount if they buy our remaining inventory by Friday. That nets to $1,200,000. Additionally, let's include a lax return policy so they can return it if they don't need it! That way, we can lock in the sales for 3rd quarter financials. See if that is something they are interested in and get back to me. I can't tell you how important it is that we make this happen, not only for NWSupplies but for all of us. I'm expecting good news! I have copied John on this email so he is in the loop. JS Jack Smith From: Hunter, John (JHunter@NWSupplies.com) [Chief Financial Officer] Sent: Friday, September 28, 2012 9:43 AM To: Hinton, Lisa (LHinton@NWSupplies.com) [Controller] Cc: Subject: RE: Entry for MDJ Sales Lisa - Please proceed with putting it in the books. Are we still on for tomorrow night? ;) Regards, John Hunter Chief Financial Officer JHunter@NWSupplies.com | www.NWSupplies.com Please consider the environment before printing From: Hinton, Lisa (LHinton@NWSupplies.com) [Controller] Sent: Thursday, September 27, 2012 7:28 PM To: Hunter, John (JHunter@NWSupplies.com) [Chief Financial Officer] Cc: Subject: Entry for MDJ Sales John, My team just entered a journal entry for MJD that they thought was odd so they alerted me. It appears that Terry made a sale with MDJ for $1.2 million. Is this legit? Let me know. Thanks!!! Lisa Hinton Controller LHinton@NWSupplies.com | NWSupplies, Inc. Sales Fraud Appendix 2 for Case No. 1-3A Make all checks payable to NW Supplies, Inc. If you have any questions conceming this invoice, contact Terry Credit Schwartz at (602) 9711503 TSchwartz@NWSupplies.com. Additonal discount Thank you for your business! Balance due Return Policy: Items returned within 180 days of sale will be exchanged in full