Question
Foresnic Accounting, 2nd Edition 50. The Green Natural Wellness Company, aka GNWC, sells select, high-end nutritional and health and beauty products to small health food
Foresnic Accounting, 2nd Edition
50. The Green Natural Wellness Company, aka GNWC, sells select, high-end nutritional
and health and beauty products to small health food stores throughout the United
States. Its headquarters and warehouses are located in Clear Lake, Texas, only a couple
of miles from the NASA Space Center.
GNWCs key success factor is its ability to quickly bring to market new products
before other suppliers do. The company has two full-time buyers who spend all their
time traveling around the world in search of unique nutraceuticals. For example, one
of the buyers recently discovered that when a common plant in the Brazilian rain forest
is mixed with natural emollients, the result is a cream that eliminates even the most
difficult cases of acne. After the discovery, GNWC took only six weeks to bring the
product to market.
GNWC has four sales divisions that report to the vice president of sales: skin care, hair
care, nutritional supplements, and dried foods. Each division operates autonomously
with its own revenue and expense budgets. The controllers office reviews and approves
all divisional budgets.
Barbara Larkin is the head of the skin care division. In recent years, her division has
done spectacularly well with annual sales growth rates averaging in the 20 percent
range and the most recent quarters sales being just over $4 million.
Until several years ago, Barbaras division was so independent that it managed its own
collections of accounts receivable, although it forwarded all incoming customer checks
to the central finance division for deposit, and all purchase orders had to be approved
by the finance division before being forwarded to the purchasing division for additional
approval.
About two years ago, Barbara decided to turn over the collection of customer accounts
to the collections department in the finance division. Because of the rapid growth in
her skin care division, there was a shortage of staff, and she was having a difficult time
keeping up with collections. Things were so bad that she wasnt even able to get good
aging reports.
Martin Mouse runs the collection department in the finance division; he is an up-andcoming
star in the company. Rumor has it that hes in line for the vice presidency of
finance as soon as the existing VP retires or leaves the company. Furthermore, hes a
cousin of the CEO, so no one wants to get on his bad side.
Under both the present and past system, Barbaras division has a single master budget
account used for crediting all the divisions incoming cash receipts and charging the
divisions payments. As a result, the master account should effectively reflect the balance
in cash funds available to the division.
Barbara has been having problems with Martin over the last year. First, he has been
asking Mac Plata, the controller, to use his influence to permit Martin to charge
Barbaras division 7 percent of its revenues for the collection services. That fee would
Cases
244 Part II Fraud Examination Theory, Practice, and Methods
have a seriously detrimental effect on Barbaras master account and would hinder her
ability to continue to grow. Second, Martins collection department has not been doing
a good job with Barbaras collections, especially in sending out bills on time and dealing
with overdue accounts.
The problem with the collection efforts is that Martin periodically shifts his staff s
efforts to the dried foods division and doesnt give proper attention to the skin care
division. The obvious reason for this is that Betty Riley, the head of the dried foods
division, has been with the company since it was founded 15 years ago. She regularly
eats lunch with the CEO and knows everyone in the company, so Martin wants to win
her favor in the hope of furthering his climb to the finance position.
Barbara is very careful with her divisions budgets and her management of its master
account. Because her division operates as an investment center, she maintains at least
a $1 million balance in the master account at all times as a safety net. She needs this
money to be available in case there is a sudden interruption or downturn in sales so
that she could continue to operate and pay employees until she could resolve the sales
issue.
On the first day of a new month, Barbara reviewed the balance in her master account;
it was about $2.3 million. Following her normal practice, she attempted to reconcile
this against her internal sales records. She couldnt reconcile the balance against actual
cash receipts because Martins collections department handles and processes all
receipts. Furthermore, Barbara had to estimate collected sales because sales collection
reports were about three months behind in the system, thanks to the fact that Martin
inputs all collection data into spreadsheets and forwards them only sporadically to the
accounting department.
Barbara took the beginning balance in the master account, subtracted new expenses
(which she knew because she has to submit purchase requisitions and payroll authorization),
and then added an estimate of newly collected sales. She had a pretty good
idea of what the collected sales should be because when she handled her divisions collections,
95 percent of accounts receivables were collected within 30 days of billing.
Barbara checked and rechecked her calculations. The balance in her master account
should have been about $1.1 million, not $700,000 as the system reported. That meant
that her account was short about $400,000.
Being a little afraid of Martin and mindful of their argument over the collection departments
charging for her services, Barbara caught him in the hallway and casually asked
him to look into the matter. She didnt immediately blurt out her request but inserted it
into a casual conversation regarding an injury accident that had occurred in the warehouse
the day before.
Over the following week, Barbara again mentioned the issue on the phone with Martin,
but he seemed totally uninterested in helping. Finally, Barbara called him again
and told him that if she didnt get an answer in one day, she would have to report the
issue to Martins boss, the VP of finance.
Barbara was absolutely sure that the $400,000 had disappeared. She was afraid that
Martin had been embezzling incoming receipts. Furthermore, regardless of what
happened to the missing funds, Martin had the responsibility for keeping up with collections
and should have been able to explain what happened to the missing funds.
The next morning Barbara received a call from Myrna Wilson, the secretary to Victor
Vaccio, the VP of finance. Myrna spoke as if Barbara were in trouble:
Mr. Vaccio considers this to be a serious problem. Hes looking into it.
Chapter 8 The Evidence Collection Process 245
Barbara was a little shaken because she hadnt even reported the problem yet.
Barbara had friends in various places in the company. One friend, who works in the
assistant controllers office, told her that Martin was telling Victor and everyone else
that Barbara had overspent her budget in the previous quarter.
Barbara then received an e-mail from the CEOs secretary advising her that her master
account was frozen and that Victor must personally approve any expenditures except
for continuing payroll. The CEO himself had told Victor to conduct a complete investigation.
He wanted a complete audit of all sales and collections beginning with the
previous quarter.
Barbara was stunned. The CEO had swallowed Martins story about Barbaras having
overspent her budget in a previous period, hook, line, and sinker. And Martin was
doing the audit.
To make things worse, Barbaras sales analysis and reconciliation to her master
account made her sure that the money had disappeared in the current quarter, not in
the previous one. That meant that the investigation would go nowhere for some time,
and in the meantime, her budget would remain frozen, and she would have to live with
the embarrassment and disgrace that come with being suspected of irresponsible
financial conduct.
Barbara called Martin and offered her help in locating the missing funds, but he
refused. Ive been instructed to keep our investigation independent, he said. Sorry,
but this means we cant use any outside help.
a. From a process standpoint, evaluate how well this investigation began to unfold.
b. Should Barbara have done anything differently?
c. What changes, if any, would you recommend be made to the system?
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