Forensic accounting

LEARNING OBJECTIVES After completing and discussing this case, you should be able to Evaluate misappropriation risk factors. Evaluate internal controls. Design new control. Understand governance in non-profit sector. Analyze materiality decisions. Apply SAS 99, PCAOB AS5, and SAB 99. Perform cost benefit analysis. KNOTTYVILLE COUNTRY CLUB: AN INSTRUCTIONAL CASE ON ASSET MISAPPROPRIATION There was a stunned silence in the courtroom as the Circuit Judge was about to announce the sentence. You are sentenced to 15 years in prison for grand theft. Your abominable conduct ran long and deep, and it is now time to pay for it, said the judge. The judge also suspended an additional 25 years in prison time for Fancy Rockbottom. One of the members of the country club told Fancy that she was trusted as a family member by the patrons of the club and that trust was betrayed by Fancy. OVERVIEW OF THE CLUB: cers to the deserts. It also kiilt on the Knottyville Country Club (the Club) caters to the desires of its 1,800 dues-paying full members, 800 associate members and their guests. It also rents out its halls and ballrooms for weddings, reunions, and other gatherings. Built on the banks of the Missouri river, Knottyville Country Club offers a variety of exciting, fun-filled activities for its members. The Club was established in 1944 with a ce its opening, the Club an outdoor swimming pool. Since its or 007) has one of the most in he most impres nine-hole golf course and an outdoor swimmin has steadily continued to expand. It now in 2007) ba sive 27-hole golf courses in the upper Midwest. courts, a spectacular door basketball court, rant, a bar and other opuler there was a six-month ts, family reunions very two years by the members. It the upper Midwest, six tennis courts. with lovely views, two swimming pools, an indoor 1 beautiful dining rooms with chandeliers, a restaurant. ries The Club facilities were in great demand and there w e to book the halls for company picnics, banquets, famil, waiting time to book the halls for compan the like. There was also a waiting period to ga wedding receptions, and the like. There was a membership. try Club is a member-owned, private country club. Th. Knottyville Country Club is a member-ow seven member board of directors is elected every two years by the indudes four officersthe president, vice president, secretary and treasurer is responsible for the day-to-day management of the Club. The board has bm powers to borrow money and to enter into contracts necessary for the normal Operation of the Club. The Club has five committees - membership commit Tee the finance committee, the nominating committee, the construction and maintenance committee and the special events committee. The finance commit- tee has three members elected from the membership at large and the treasurer is an ex-officio member of the finance committee. The finance committee met just twice a year. The Club was taking in approximately $8 million each year in membership fees alone. In addition, the restaurant, the bar, banquets, rentals and a variety of other programs brought in an additional $18 million each year. The president of the club was a friendly, jovial fellow and treated everyone with great warmth. He had no accounting or finance background. He was very trusting of people, in general and considered all employees and members as belonging to one big happy family. SHENANIGANS OF THE GENERAL MANAGER: Fancy Rockbottom was employed by the Club in a variety of capacities for twenty-two years including the bookkeeping function. The last six years she served as the general manager and continued to serve as the bookkeeper the Club. Fancy was also in charge of ordering all supplies. The Club policy required two signatures on each check. As the general manager, Fancy check signing authority. The other signature had to come from another oyce, Sarah or from Robert, who is on the board of directors and is cf. Fancy often asked Sarah to sign blank checks in advance so e can pay the bills on time and does not have to wait for the sec unsuspecting Sarah would readily oblige and would sign se the treasurer. Fancy often asked Sarah blank checks from time to time. the bookkeeper, Fancy was in charge of maintaining the records. She did the monthly bank reconcil Fancy would meet with the finance committee of the bo the financial situation. She would prepare simple of maintaining the accounting ation as well. Every three months mittee of the board and report about "pare simple profit and loss statements and a balance sheet. Working with the treasurer, she also presented the annual budget to the finance committee for its approval. Because Fancy was in charge of ordering supplies, she would often insist that they buy alcoholic beverages from a particular supplier who was her college classmate, Members of the Club were allowed to charge their meals and drinks and pray for them later when the monthly statements are mailed to them. Fancy would charge a few dollars extra to some members' monthly restaurant/bar bills. If the members did not notice the extra charge, she would keep the money. If the members complained that they did not order that item or were not at the club on that day, she would apologize, blame it on clerical error and give credit to the complaining members. She would then accuse the server of punching in the wrong member number and take small amounts of money ($50, $36, $84 etc.) out of the paychecks of servers. Fancy's argument was that the servers had to pay for the mistakes they made. The amounts taken from the servers were quite small when compared to the gigantic amount stolen. Fancy has been spotted by her co-workers at various video lottery parlors over the years. There is a rumor that she had a mild gambling addiction. She had acquired a couple of expensive sports cars in recent years and has taken several expensive vacations to exotic places including the French Rivera, Bangkok, and the Bahamas. It was revealed in court that Fancy had paid off large personal credit card debts of her family using the stolen money. The grand theft occurred evenly over a six-year period from 2001 to 2006. Ironi- cally, it was a bank official who got suspicious about some transactions and alerted the president of the club. The bank official did some investigation when he found out that the business account of the Club was overdrawn. His investigation revealed that Rockbottom was depositing high dollar amounts from her personal account to take care of the balance. Alarm bells rang. He blew the whistle by informing the Club president about his suspicions. The Club terminated Fancy's employment in February, 2007 and ordered an internal investigation. A month later, the Club also filed a police complaint about the grand theft. When Fancy was sentenced to 15 years in prison, she had already paid back $400,000 of the $1.2 million she had embezzled. She has sold her home and other assets to pay back this money. The Club is unlikely to get any more money from Fancy and the remaining $800,000 is gone. This whole episode has made many club members rather uneasy and 400 of them have already quit the club. The debt is mounting for the Club and its future looks rather bleak. Note: Only a few of the facts mentioned in this case actually occurred in a real life situation. Several more fictitious information pieces were added to enhance the learning objectives of this auditing case. All names are fictitious. ou can consult a couple of documents readily available in the public domain: framework for auditing internal control for small companies and a fraud hecklist from the Association of Certified Fraud Examiners. 1. List in detail the internal control weaknesses and weaknesses in monitoring that existed at the Knottyville Country Club. 2. As part of your consulting agreement you are to provide recommended changes to controls and monitoring systems. Communicate to the Board your recommended changes to the controls and monitoring systems. 3. Assume you are the external auditor and you need to address the following: a. List the risk factors (red flags) for asset misappropriation that are present at the Knottyville Country Club (Review SAS (Statement on Auditing Standards) 99.) b. What audit procedures would you perform to make sure that there was no embezzlement at the Club and the financial position of the Club is fairly stated. (List them in detail in bullet format)