Forensic Accounting Case Study Series sponsored by Deloitte FAS LLP and the Deloitte Foundation Check Fraud Fun & Games Corporation Case No. 2-5 Fun & Games Corporation Case Study

Company Overview

Fun & Games Corporation (Fun & Games or the Company) is a local toy store that sells all types of childrens toys and is based in Alexandria, Virginia. The Company has been in business since 1950 with multiple locations in the DC area. The Company has continued to grow and has beat its revenue projections for the past few years.

Scenario

You are a Partner at Knox LLP (Knox), a boutique forensic accounting firm located in

Washington, D.C. On 30/1/2020 you received a call from your long-time friend Howard Green, the chief legal officer at the Company, requesting a meeting with you during the month of February 2020, regarding an alleged fraud scheme committed by Carla Cosgrove, an employee at Fun & Games. During the meeting, you learned the following facts:

Overview of the Allegation:

1. Two weeks ago, Harold Lewis, CFO of the Company, received a phone call from the Companys bank explaining a check drawn on its operating account had been flagged as potentially fraudulent and an employee of the Company had presented the check for deposit.

2. The check in question was for $50,000.25 and had been issued to one of Fun & Games largest vendors, Buddy the Elf Toy Store.

Company Structure:

1. Fun & Games has multiple departments based on toy type. The departments are as

follows:

a. Games

b. Building Sets & Blocks

c. Action Figures

d. Dolls

e. Stuffed Animals

f. Pretend Play & Dress-Up

g. Outdoor Play

2. Each department furthers breaks down costs based on a cost center or a specific

category within the department.

3. The specific cost center codes and titles for the Games department are as follows:

a. G101 - Card games

b. G102 - Board games

c. G103 - Puzzles

d. G104 - Electronic & interactive games

e. G105 - Magic

f. G106 - Travel games & novelties

g. G107 - Game Rooms

h. G108 - Marketing

i. G109 - Taxes

j. G110 Telephone

k. G111 Internet

l. G112 Electric

m. G113 Office Supplies

Initial Investigation/Background Facts:

After receiving a phone call from its bank, the Company performed an initial investigation and uncovered the following facts:

1. Buddy the Elf Toy Store is a legitimate vendor of Fun & Games and the check in question was a quarterly payment due on Invoice Number 78320 as part of the Companys recently updated contract with Buddy the Elf Toy Store.
2. The invoice in question was retrieved from the Accounts Payable (AP) department and had been approved and submitted for payment by Carla Cosgrove of the Games department.
3. Carla had requested that the check for Buddy the Elf Toy Store should be returned to her by the AP department once it was issued and she would mail it to the vendor.
4. The Company contacted Buddy the Elf Toy Store and Buddy the Elf Toy Store confirmed that all other invoices paid to Buddy the Elf Toy Store were legitimate and the funds had been received.
5. The investigation involved discussions with Buddy the Elf Toy Store and the Companys Accounts Payable department. During the internal discussions it was discovered that Carla often didnt follow procedures.
6. After finding out that Carla didnt adhere to procedures, the Company sent her home to complete their investigation without her present.
7. The Company suspect that Carla Cosgrove was acting fraudulently and terminated her from the Company. At the time of her termination her annual salary was $50,000.
8. Carla Cosgrove joined the Company in 2015 and has always been a budget director in the Games department of the Company.
9. Carlas regular duties included overseeing the budget process for each of the cost centers within the department and working with the Companys Chief Budget Director to integrate the Games department budget within the overall budget for the Company, attending quarterly budget meetings and attending the yearly budget presentations to Company management for approval.
10. In approximately 2016, Carla had been delegated additional responsibilities from the head of the Games department, Harvey Peacock, to include approving and processing vendor payments and employee expense reimbursements.
11. Carla was a well-liked employee and had made friends with a number of the staff in the AP department.
12. The Company learned a number of items about Carla from the initial interviews conducted with employees, including the following:

a. Carla was an avid traveler and had taken numerous trips in the past few years to the Caribbean.

b. Carla and her husband had recently built a large home in Kensington, MD.

c. Carla drove a Lexus SUV with a license plate that read Flowers.

d. Carla had lots of expensive looking jewelry and designer hand bags, which

employees had assumed were fake.

13. The Company learned Carla had purchased a floral business in approximately 2018 called Flower Patch Incorporated. Preliminary internet searches listed the address of the business at 732 Independence Way, Kensington, MD.

Engagement:

After the preliminary meetings are concluded, you meet again with Howard and he tells you the Company is concerned that Carla had submitted other fictitious invoices. Therefore, you are being asked to perform a forensic investigation and prepare a report that present your findings to the CFO

Company Overview

Fun & Games Corporation (Fun & Games or the Company) is a local toy store that sells all types of childrens toys and is based in Alexandria, Virginia. The Company has been in business since 1950 with multiple locations in the DC area. The Company has continued to grow and has beat its revenue projections for the past few years.

Scenario

You are a Partner at Knox LLP (Knox), a boutique forensic accounting firm located in

Washington, D.C. On 30/1/2020 you received a call from your long-time friend Howard Green, the chief legal officer at the Company, requesting a meeting with you during the month of February 2020, regarding an alleged fraud scheme committed by Carla Cosgrove, an employee at Fun & Games. During the meeting, you learned the following facts:

Overview of the Allegation:

1. Two weeks ago, Harold Lewis, CFO of the Company, received a phone call from the Companys bank explaining a check drawn on its operating account had been flagged as potentially fraudulent and an employee of the Company had presented the check for deposit.

2. The check in question was for $50,000.25 and had been issued to one of Fun & Games largest vendors, Buddy the Elf Toy Store.

Company Structure:

1. Fun & Games has multiple departments based on toy type. The departments are as

follows:

a. Games

b. Building Sets & Blocks

c. Action Figures

d. Dolls

e. Stuffed Animals

f. Pretend Play & Dress-Up

g. Outdoor Play

2. Each department furthers breaks down costs based on a cost center or a specific

category within the department.

3. The specific cost center codes and titles for the Games department are as follows:

a. G101 - Card games

b. G102 - Board games

c. G103 - Puzzles

d. G104 - Electronic & interactive games

e. G105 - Magic

f. G106 - Travel games & novelties

g. G107 - Game Rooms

h. G108 - Marketing

i. G109 - Taxes

j. G110 Telephone

k. G111 Internet

l. G112 Electric

m. G113 Office Supplies

Initial Investigation/Background Facts:

After receiving a phone call from its bank, the Company performed an initial investigation and uncovered the following facts:

1. Buddy the Elf Toy Store is a legitimate vendor of Fun & Games and the check in question was a quarterly payment due on Invoice Number 78320 as part of the Companys recently updated contract with Buddy the Elf Toy Store.
2. The invoice in question was retrieved from the Accounts Payable (AP) department and had been approved and submitted for payment by Carla Cosgrove of the Games department.
3. Carla had requested that the check for Buddy the Elf Toy Store should be returned to her by the AP department once it was issued and she would mail it to the vendor.
4. The Company contacted Buddy the Elf Toy Store and Buddy the Elf Toy Store confirmed that all other invoices paid to Buddy the Elf Toy Store were legitimate and the funds had been received.
5. The investigation involved discussions with Buddy the Elf Toy Store and the Companys Accounts Payable department. During the internal discussions it was discovered that Carla often didnt follow procedures.
6. After finding out that Carla didnt adhere to procedures, the Company sent her home to complete their investigation without her present.
7. The Company suspect that Carla Cosgrove was acting fraudulently and terminated her from the Company. At the time of her termination her annual salary was $50,000.
8. Carla Cosgrove joined the Company in 2015 and has always been a budget director in the Games department of the Company.
9. Carlas regular duties included overseeing the budget process for each of the cost centers within the department and working with the Companys Chief Budget Director to integrate the Games department budget within the overall budget for the Company, attending quarterly budget meetings and attending the yearly budget presentations to Company management for approval.
10. In approximately 2016, Carla had been delegated additional responsibilities from the head of the Games department, Harvey Peacock, to include approving and processing vendor payments and employee expense reimbursements.
11. Carla was a well-liked employee and had made friends with a number of the staff in the AP department.
12. The Company learned a number of items about Carla from the initial interviews conducted with employees, including the following:

a. Carla was an avid traveler and had taken numerous trips in the past few years to the Caribbean.

b. Carla and her husband had recently built a large home in Kensington, MD.

c. Carla drove a Lexus SUV with a license plate that read Flowers.

d. Carla had lots of expensive looking jewelry and designer hand bags, which

employees had assumed were fake.

13. The Company learned Carla had purchased a floral business in approximately 2018 called Flower Patch Incorporated. Preliminary internet searches listed the address of the business at 732 Independence Way, Kensington, MD.

Engagement:

After the preliminary meetings are concluded, you meet again with Howard and he tells you the Company is concerned that Carla had submitted other fictitious invoices. Therefore, you are being asked to perform a forensic investigation and prepare a report that present your findings to the CFO

1. Identify and explain any red flags that you uncovered during your investigation?
2. If you identified any potentially fraudulent vendor(s), which vendor(s) are they?
3. Calculate the amount identified as potentially fraudulent in the Games Department AP Data provided?
4. What are the types of fraud that have been committed in this case
5. Describe the perceived opportunities that existed (Fraud Triangle) and how the fraud could have been perpetrated and covered up.
6. What controls could be implemented to help prevent other potential fraudulent activity from occurring in the future?