FRAUD CASE

GAMMA CONSTRUCTION COMPANY

Gamma Construction Company builds and furnishes hotels for third parties. Some of its largest clients include the Helton and Sheradon Corporations. While its construction projects take place throughout the world, its project accounting is centralized in one location. This requires fairly sophisticated accounting information technology systems. For example, to purchase materials for a project, a project supervisor enters a purchase requisition (PR) electronically at the job site. The PR includes a description of the item(s) to be purchased, the vendor from whom the purchase is to be made, and the purchase price. Because of its geographically disbursed operations, the company has approximately 1,500 authorized vendors.

The PR must be electronically approved by the Accounting Department before the Purchasing Department may initiate the purchase. If the PR is for a purchase from an authorized vendor and is within the projects budget, it is approved electronically by the corporate controller. If the PR does not include an authorized vendor or is not within the projects budget, the controller determines whether the chief nancial ofcers (CFOs) approval is needed. If needed, once the CFOs approval is obtained, the controller adds the vendor to the list of authorized vendorsincluding the vendors contact informationor revises the projects budget estimate. The PR is then sent electronically to the Purchasing Department, where the goods are ordered. Depending on the urgency of the goods, the order is placed by mail, phone, or Internet. The project supervisor receives an email stating that the order has been placed. Once the goods have been received at the project site, the Accounting Department receives an electronic notication from the project supervisor which serves as the nal authorization to pay. The CFO signs all checks. Checks in the amount of $100,000 or more also require the presidents signature.

The CFO and controller have both been with the company for in excess of ve years. The controllers spouse recently obtained a degree in construction management and was hired by Gamma to be a project supervisor.

The controllers daughter was recently diagnosed with a rare disease. The disease is curable, but requires extensive treatment and hospital stays, much of which is not covered by insurance. The controllers spouse has nally graduated and is now working, but student loan payments are coming due. The controller expects to be promoted to CFO within the year, and a large increase in pay comes with the promotion. This means that money issues are likely only temporary.

As a way of receiving a much needed advance on his salary, the controller suggests that his spouse, a project supervisor, place a ctitious order for goods needed on her project in the amount of $99,500. The controller also makes sure that the ctitious order is associated with a start-up project so that the PR will not result in the project being over budget. The order should be placed with the company, American Productsa ctitious vendor with a name very close to one of the companys authorized vendors, American Projects.

The controller authorizes the fictitious PR after updating the approved vendor list to include American Products and its contact information (a post office box established by the controller). The order is placed by mail in the Purchasing Department. The controllers spouse, as project supervisor, sends an electronic notification of the goods receipt to the Accounting Department. The Accounting Department processes the payment. The CFO signs the check. The check is mailed to American Products post office box, where the controller picks it up and deposits it.

Question:

What are the red ags present that suggest the possibility of fraud? Are there conditions present suggested by the fraud triangle that may facilitate fraud? Are there IT-related issues that could facilitate fraud?

How would the fraud impact the financial statements? What accounts would be misstated?