Fun & Games Corporation (“Fun & Games” or the “Company”) is a local toy store that sells all types of children’s toys and is based in Alexandria, Virginia. The Company has been in business since 1950 with multiple locations in the DC area. The Company has continued to grow and has beat its revenue projections for the past few years.

Scenario

You are a Partner at Knox LLP (“Knox”), a boutique forensic accounting firm located in Washington, D.C. On 30/1/2020 you received a call from your long-time friend Howard Green, the chief legal officer at the Company, requesting a meeting with you during the month of February 2020, regarding an alleged fraud scheme committed by Carla Cosgrove, an employee at Fun & Games. During the meeting, you learned the following facts:

Overview of the Allegation:

1. Two weeks ago, Harold Lewis, CFO of the Company, received a phone call from the Company’s bank explaining a check drawn on its operating account had been flagged as potentially fraudulent and an employee of the Company had presented the check for deposit.

2. The check in question was for $50,000.25 and had been issued to one of Fun & Games’ largest vendors, Buddy the Elf Toy Store.

Company Structure:

1. Fun & Games has multiple departments based on toy type. The departments are as follows:

a. Games

b. Building Sets & Blocks

c. Action Figures

d. Dolls

e. Stuffed Animals

f. Pretend Play & Dress-Up

g. Outdoor Play

2. Each department furthers breaks down costs based on a cost center or a specific category within the department.

3. The specific cost center codes and titles for the Games department are as follows:

a. G101 - Card games

b. G102 - Board games

c. G103 - Puzzles

d. G104 - Electronic & interactive games

e. G105 - Magic

f. G106 - Travel games & novelties

g. G107 - Game Rooms

h. G108 - Marketing

i. G109 - Taxes

j. G110 – Telephone

k. G111 – Internet

l. G112 – Electric

m. G113 – Office Supplies

Initial Investigation/Background Facts:

After receiving a phone call from its bank, the Company performed an initial investigation and uncovered the following facts:

1. Buddy the Elf Toy Store is a legitimate vendor of Fun & Games and the check in question was a quarterly payment due on Invoice Number 78320 as part of the Company’s recently updated contract with Buddy the Elf Toy Store.

2. The invoice in question was retrieved from the Accounts Payable (“AP”) department and had been approved and submitted for payment by Carla Cosgrove of the Games department.

3. Carla had requested that the check for Buddy the Elf Toy Store should be returned to her by the AP department once it was issued and she would mail it to the vendor.

4. The Company contacted Buddy the Elf Toy Store and Buddy the Elf Toy Store confirmed that all other invoices paid to Buddy the Elf Toy Store were legitimate and the funds had been received.

5. The investigation involved discussions with Buddy the Elf Toy Store and the Company’s Accounts Payable department. During the internal discussions it was discovered that Carla often didn’t follow procedures.

6. After finding out that Carla didn’t adhere to procedures, the Company sent her home to complete their investigation without her present.

7. The Company suspect that Carla Cosgrove was acting fraudulently and terminated her from the Company. At the time of her termination her annual salary was $50,000.

8. Carla Cosgrove joined the Company in 2015 and has always been a budget director in the Games department of the Company.

9. Carla’s regular duties included overseeing the budget process for each of the cost centers within the department and working with the Company’s Chief Budget Director to integrate the Games department budget within the overall budget for the Company, attending quarterly budget meetings and attending the yearly budget presentations to Company management for approval.

10. In approximately 2016, Carla had been delegated additional responsibilities from the head of the Games department, Harvey Peacock, to include approving and processing vendor payments and employee expense reimbursements.

11. Carla was a well-liked employee and had made friends with a number of the staff in the AP department.

12. The Company learned a number of items about Carla from the initial interviews conducted with employees, including the following:

a. Carla was an avid traveler and had taken numerous trips in the past few years to the Caribbean.

b. Carla and her husband had recently built a large home in Kensington, MD.

c. Carla drove a Lexus SUV with a license plate that read “Flowers.”

d. Carla had lots of expensive looking jewelry and designer hand bags, which employees had assumed were fake.

13. The Company learned Carla had purchased a floral business in approximately 2018 called Flower Patch Incorporated. Preliminary internet searches listed the address of the business at 732 Independence Way, Kensington, MD.

14. A meeting with AP supervisor have conducted and she provided the following information about payable process :

a. The Company’s Fiscal Year start at July 1 and end in June 30.

b. The Company processes all vendor payments on a weekly basis on Thursday. To have a vendor paid that week, the invoice must be received by AP by Tuesday at noon.

c. The invoice must contain the signature of the authorized signor for each department to process the invoice. The authorized signor is by default the head of each department; however, the authority can be delegated. If signatory authority is delegated, the name of the delegate must be provided to the AP department.

d. The invoice must also contain a cost center code for it to be appropriately allocated in the system for budget and expense purposes.

e. The invoices are entered into the system and reviewed against the batch sheet by the Controller for accuracy. Once the Controller signs-off, the checks are issued on Friday morning and mailed by the AP department the same day.

f. The Company allows departments to request a check be returned to the requestor and Mailed. This is not a common occurrence but happens on rare occasions when the department wants to include correspondence or something else with the payment.

15. There instruction have been received through email from Carla Cosgrove (Appendix A in Blackboard)

Engagement:

After the preliminary meetings are concluded, you meet again with Howard and he tells you the Company is concerned that Carla had submitted other fictitious invoices. Therefore, you are being asked to perform a forensic investigation and prepare a report and present your findings to the CFO

Required:

1. Form into group of 5 - 6 students.

2. Use the information provided in the case above and the Excel file “Fun and Game AP Data” to perform investigation. Find the excel file in blackboard (Assignment folder).

3. Write a forensic report that answer the questions below: (A template of the report provided below ) (25 marks)

a. Identify and explain any red flags that you uncovered during your investigation?

b. If you identified any potentially fraudulent vendor(s), which vendor(s) are they?

c. Calculate the amount identified as potentially fraudulent in the Games Department AP Data provided?

d. What are the types of fraud that have been committed in this case

e. Describe the perceived opportunities that existed (Fraud Triangle) and how the fraud could have been perpetrated and covered up.

f. What controls could be implemented to help prevent other potential fraudulent activity from occurring in the future?