Forensic accounting case study with questions beginning on page 18.

Page 127 DRINKING UP THE PROFITS: A FORENSIC ACCOUNTING CASE Vincent Shea, Saint John's University Bobby Waldrup, University of North Florida Robert Slater, University of North Florida CASE DESCRIPTION This case introduces students to several forensic and cost accounting techniques. Students will read along as Dr. Scott Graham performs a forensic investigation at Sullivan's Bar. Students will be exposed to determining expected sales based on inventory usage, invigilation, observation, and other general accounting techniques. The case is targeted for students in an undergraduate forensic accounting class or cost accounting class. The case may be used as an in class discussion mechanism or assigned as a take home project. The case can be discussed fully within a one hour class if students have pre-prepared for the case. Students should expect to spend about 3-6 hours of preparation time outside of class. CASE SYNOPSIS This case is based on happenings at Sullivan's Bar, a drinking establishment owned by Frank Sullivan. Over the past few years Frank has noticed a decline in profits from Sullivan's Operations, even though there seems to be more customers in the bar. Frank asks one of his regulars at the bar, Dr. Scott Graham for help. Dr. Graham is an accounting professor at the local university and teaches accounting information systems. Dr. Graham challenges a few of his graduate students to help determine what could be causing the decline in bar revenues. The case features Dr. Graham and his students as they explore operations at Sullivan's Bar. To determine where the lost profits may be hiding, Dr. Graham and his students examine the financial records, document operations, brainstorm on ideas, and do an onsite investigation and invigilation at the bar. MONDAY AFTERNOON SULLIVAN'S BAR Its four o'clock Monday afternoon at Sullivan's Bar. There are currently only two people in the bar: owner Frank Sullivan and longtime regular Scott Graham. Sullivan's is a casual drinking establishment in a coastal college town. The bar has two types of clientele: during lunch time and in the afternoon and evenings many of the locals stop in for a drink during lunch breaks and after work, at night, the crowd is mostly young college students. Scott Graham is an assistant professor of accounting at the local university. From time to time Scott sneaks out of his office to go have a drink at Sullivan's. He visits the bar a couple days a week because he likes the people and the beer is fresh. Scott's students know they can Journal of the International Academy for Case Studies, Volume 18, Number 7, 2012 Page 128 often find him down at the bar if they missed him during office hours. Today Scott decided to head to Sullivan's to finish grading his auditing class' exams. \"Hey professor, are you going to have your usual today,\" says Frank. \"Absolutely,\" says Scott with stress in his voice. \"I have so many exams to grade but I need a drink before I start. I procrastinated grading these things all weekend. Now I will probably be up most of the night grading.\" Frank brings Scott his drink and Scott begins unpacking stacks of exams from his case. Frank is busy shuffling his own papers around him. \"God I hate Monday afternoon\" Frank says to Scott as he shuffles papers from one part of the bar to another and taps on the keyboard in front of him. Scott replies \"What did you say Frank? I was daydreaming and didn't hear what you said.\" \"I just said I hate Monday afternoon was all. Nobody comes to a bar on Monday afternoon\" replied Frank. Scott sheepishly lifts up his glass and replies \"Here's to nobodies!\" and then takes a swig from his glass! \"Sorry, that wasn't aimed at you.\" Frank says. \"It's just that there is very little business here on Monday afternoon and I end up becoming more of a boring accountant than an exciting bar owner. I opened this place 20 years ago with the idea that running a bar would be fun. Back then, I thought that if I owned the bar I could hang out with the customers, pay people to make the drinks and laugh all the way to the bank.\" \"Every business owner is an accountant\" Scott says, \"Some just don't know it yet. That's what I always tell my students\". For a brief second there is an uncomfortable moment of silence as Frank thinks about his assessment of accountants and about Scott's last statement. \"I know you work at the university, but I never did ask you what you taught.\" Frank says hesitantly. \"I'm an accounting professor!\" Scott says with a defiant grin on his face. \"That'll probably explain why I'm here drinking a lot during the day. You know, to get away from my boring job and my nobody life!\" \"Touch' \" Frank replies lifting his own drink and taking a swig. Frank and Scott have the common bartender-patron relationship. Whenever Scott's in the bar they usually talk about sports, politics or whatever's in the news. But today's conversation was drifting into a different direction. Frank is sitting at the bar across from Scott with cash register tapes, supply orders, and other papers and bills around him. Frank says: \"Twenty years ago I would record all this information manually on a $.50 notebook pad. Now all my information is somewhere in this $2,000 notebook computer. Up until 4 years ago I didn't even know how to turn one of these things on.\" Scott barely acknowledges the comment as he is focused on his own papers sitting in front of him. \"Scott, you mind if I ask you an accounting question? I hope you don't mind talking shop outside of work.\" Journal of the International Academy for Case Studies, Volume 18, Number 7, 2012 Page 129 \"Ok. You got me on a good day. I'd rather do anything other than grading these exams right now. What's your query?\" Scott says while sipping his drink. \"My what... what did you just call me?\" Frank says with a little anxiety in his voice. Scott realized he just used a word Frank was not familiar with. He always tried to speak to the level appropriate for his for his audience. He thought for a second about what he said and then rephrased his statement. \"Your question, Frank, what is your question?\" \"Oh. Oh yeah\" Frank says as he pretends he just didn't hear the first question. Frank then begins to describe his problem. \"I've been running this bar for over twenty years now and I have always done well. However, in the last few years the bar seems to be doing worse and worse. I don't understand why. I've been doing everything the same way I always do, I have more customers than ever, and yet what I get to keep after paying all the bills seems to be heading in the wrong direction. What do you think it could be?\" Scott says, \"Frank, that's a million dollar question with a million possible answers. I couldn't just give you a flat-out answer based on what you told me. I would have to investigate it further.\" Scott returns to grading his exams trying to figure out where he just left off. Scott is mumbling to himself as he grades each question. \"Duh that was revenue recognition... Ugh, they still don't know separation of duties by now! Well, I guess you can lead a horse to water..\" Just then Frank begins to ask a question \"Would you....?\" But stops short of completing his thought. \"Would I what?\" Scott replied looking kind of lost, having forgotten what topic they were just discussing. \"Would you look into things in my business further?\" Frank inquires of Scott. Scott looks up and repeatedly strokes his beard with his finger and thumb slowly while looking deep in thought. He then replies \"Well, I guess it could be a good project for my grad assistants. If you are willing to let us investigate your books we can spend a few hours looking for problems. \" Scott thinks to himself that it's probably just a managerial issue, but figures it would be a good discussion for his class. \"Thanks\" says Frank, \"I really appreciate it and in honor of your help, this drink is free.\" \"Oh thanks. I'll cherish this ONE drink.\" Scott says sarcastically. \"Of course, I'll expect at least a two-drink minimum.\" Franks answers with a grin, \"Ok, ok. Just help me find the problem and we'll talk about that second drink. \"I am on it, right after I finish grading these exams. That should be around next Tuesday!\" says Scott as he pantomimes shooting himself in the head with a gun made out of his finger and thumb. \"Don't do that in here\