Fraud Case 14-1

Frank Lou had recently been promoted to construction manager at a development firm. He was responsible for dealing with contractors who were bidding on a multimillion-dollar excavation job for a new high-rise. Times were tough. Several contractors had gone under recently, and the ones left standing were viciously competitive. Each contractor was responsible for submitting financial statements of their company along with their bid. Frank knew that the development firm was carefully reviewing each company to ensure that it had the necessary cash flow to complete the project. The last contractor it had hired declared bankruptcy before the project had been completed. That morning, four bids were sitting on Frank's desk. The deadline was midnight, and the bids would be opened the next morning. The first bidder, Bo Freely, was a tough but personable character that Frank had known for years. Frank had lunch with him today, and after a few beers, Bo hinted that he had "inadvertently" left some cash payments of operating expenses out of his statement of cash flows so that his operating cash flows could look better. Bo told Frank that he was waiting on several clients to pay him for past jobs but that he knew he would be receiving the money shortly. After lunch, Frank thought carefully about what Bo had said and decided not to mention anything to his company. He knew that Bo's firm was a reputable company and would be around for a long time.

1. Was Frank's company hurt in any way by this fraudulent action?

2. How could this action hurt Frank?

3. How can a business protect against this kind of fraud?