If You Need Love, Get a Puppy:

A Case Study on Professional Skepticism and Auditor Independence

The Case

Life is good, thought Will Stallard as he got into his truck that October morning. He could have been thinking of any one of a number of thingshis wife of seven years, his beautiful baby girl, or his job as a staff auditor at Dykstra, Banister, and Huston (DB&H), a CPA firm with offices in Montgomery and Mobile, Alabama. Or, maybe it was the slight chill in the air and the opening of bow-hunting season in nine days. Whatever it was, his feeling of satisfaction inspired him to reflect on the path that got him to this point this morning.

As a nontraditional student at a local university, he struggled to balance competing demands on his time. He maintained his business as a plumber while carrying nine hours of classes per semester. He could have made a fine living as a plumber, as his father did before him. But, as he half-joked to his auditing professor, ''I want a job where I take a showerbeforeI go to work.'' It had taken seven long years, a lot of patience from his wife, and his dad coming to the rescue on more than a couple of his plumbing jobs, but he had reached his goal. It had taken several unsuccessful attempts, but he had finally passed the CPA exam. After spending a year with a large regional firm, he had switched jobs four months ago to decrease his travel and overtime as the baby's due date approached. He seemed to be on his way. Life was good, or was it just the lack of sleep dulling his senses?

This morning, his commute would be a short one. He was auditing the Town of Rosedale, a bedroom community northeast of the city and just five miles from the town where he had lived since he was four. This was his first engagement on his own at DB&H. Of course, his work would be reviewed, but he was going to be the only one at the offices of the Town of Rosedale. DB&H had been doing the audit for the last four years and had never had any problems. Of course, controls could be tighter; they made recommendations for the improvement of handling cash receipts and disbursements every year, most of which were disregarded. But the relationship with the mayor and the financial staff was good, and Vince Huston, the partner that he had worked with on his first three engagements, thought that Will was ready. When Will told him that Jessica Randle, the assistant Clerk of Court for the Town of Rosedale, was the wife of his best friend, Vince said that it didn't violate any independence rules and that his biggest concerns were related to time management rather than objectivity. Vince said, ''The key on this job is to realize that they are a small municipality and they are not going to be perfect. It's easy to get too hung up on this notion of precision and perfection that you might have gotten from the textbooks. The world doesn't work that way. I am glad that you know Jessica. It is important for you as a first-time in-charge to have a client contact that can help you avoid blowing the budget. Her presence could go a long way toward helping you feel more comfortable.''

Three days into the job, he was not sure he would go all the way tocomfortablein describing the job so far. Yes, it was nice that Jessica was a point of contact within the organization, but she seemed somehow different at work. Then, there was the challenge of running his first engagement. He couldn't begin to count the number of times he wanted to pick up the phone and call Vince. He had already called him twice in the first four days of the audit.

Vince had been more than willing to help, and his advice helped to steer him in the right direction. Still, he felt as if he shouldn't need the help.

He missed the certainty that he had as a plumber. Although plumbing challenged his mind as well as his body, at the end of the day if the pipes fit and he wasn't getting wet, he knew he had done his job. Auditing, he was finding out, wasn't quite socut-and-dried.

His moment of reflection was interrupted by his ringing cell phone. It was Nacho, his best friend. Nacho earned his nickname from the golf ball-sized drop of cheese on the front of his shirt during his first date with Jessica at the Alabama State Fair. Somehow, Jess was able to see past the cheese-stained shirt to marry him, but his friends were not so generous. Their relentless jokes produced the nickname that stuck with him much longer than the stain or even the shirt itself.

''Are we on for next weekend?'' asked Nacho.

''We're good to go,'' Will replied. So far, the phone call was completely unnecessary. The two had opened deer hunting season every year since they both got bows for high school graduation. Hunting weekends had become more difficult to arrange in recent years. With the new baby, Will wasn't sure how many times he would get to go this year, but opening day with Nacho was off limits to any other activity. Although he had the good sense not to bring it up when he and his wife were planning to have a baby, he wasn't at all disappointed when the due date fell safely five months before October would roll around. He was pretty sure his wife knew it, too.

By the time they concluded their conversation, Will was at the town offices and ready to get to work. As his laptop booted up he strolled over to Jess's desk to say hello and to relay a message from Nacho. While Jess was always impulsive and free-spirited when they got together, she was all business at work. He doubted that her coworkers would believe that she was the one who would plan outings and get-togethers on impulse. ''Just leave the details to Jess,'' was the comment that he and his wife would make. They were seldom disappointed.

He could see some of those characteristics in ''Work Jess,'' just without the fun. She took on more than her share of the load and was the one that others would look for when the job had to get done. As he was leaving her desk, Will mentioned, ''I will see you later this morning. I am testing revenue; it's pretty routine stuff. I will try not to get in your way too much.'' Although her reply was polite enough, Will got the feeling she wouldn't mind if he didn't get in her way at all.

By midmorning Will was ready to tackle the following audit program step, ''Select, at random, a sample of 20 traffic tickets marked as paid per the receipt book for misdemeanor traffic violations. Trace to sheriff's computerized records as being paid, to bank deposit slips, and to bank statements.'' The ticket receipt book had columns for the ticket number, amount, date, reason for the ticket, and a column to mark when it was paid. The audit procedure was routine. Now that he was gaining some experience on the job, Will was starting to notice certain patterns. For 90 percent of the documents he vouched or traced, he found no problems. For the remaining 10 percent, a document or a signature might be missing. Those 10 percent had a way of blowing the time budget. The document always turned up. The explanation was usually that the person normally responsible was sick that day or on vacation, so something was filed incorrectly. Or, if there were a misstatement, it would have been unintentional and immaterial. The gloom and doom prophecies of his auditing professor were turning out to be more of a hindrance in his career than a help. The echoes of the wordskepticismthat he heard all the time in audit class were gradually giving way to the wordstime management.

So far, the work on ticket revenues was falling into the same pattern. Of the 20 selected, 18 were paid by check, credit card, or money order, and two were paid with cash. All of the non- cash transactions and one of the cash transactions were accounted for exactly as they should have been. One of the two cash payments did not appear to have made it into that day's bank deposit, however.Here we go again, thought Will as he prepared to look for possible explanations as to why that one cash receipt was not deposited that day. His first step was to check the deposits later in the weeknot there. He could see the hands of the clock in his mind start to spin in fast- forward. He double-checked the ticket to be sure that it was shown as received in the receipt book and sheriff's computer records. It was. Rather than spend a lot more time trying to figure this one out, he decided to take it to Jess.

''I have a ticket marked as paid in cash in the receipt book, but it does not show up on the bank deposit. It is showing as paid on the sheriff's computer and the daily receipts voucher. Do you have any idea why or how that could have happened?''

Jess seemed unsurprised by the query. ''Sure, there could be several explanations. The most likely is that it got included with the other cash around here. Can you tell me the ticket number? I can look for it when I get through with this report today or first thing in the morning.'' Her casual tone was reassuring and Will thought nothing more of it as he finished up.

When Will got in the next morning he had a note from Jess waiting for him. ''I found it. See me when you get a chance.''

As Will approached, Jess had a bank deposit in her hand. ''It was just as I thought. The deposit had fallen in between two cabinets in the vault. We must have wrapped up late that evening and decided to include it with the next day's deposit. So, we locked it up. The problem was that it fell and we never missed it. The money is all here, though.''

That makes sense, he thought,given that they don't have many tickets paid in cash and that Jess was always working late. At the end of the day, Jess or the other assistant clerk would check the receipt book, prepare a voucher to send to the sheriff's office to update its computer for all tickets paid that day, prepare the deposit slip for any cash and checks, and make the deposit. Will noticed the perfectly penned letters in blue ink on the deposit slip, the unmistakable handwriting of his good friend. He counted the money. All $320 was present and accounted for in crisp, new bills. He turned to Jess, ''Great! I knew that there would be a reasonable explanation. This should help to keep us from getting bogged down on this small item. Do you mind if I take this to my desk? I just need a couple of minutes to cross-check a few document numbers.''

As Will returned to his desk, he wondered why he didn't feel any better. The money was all there. The explanation was certainly reasonable.It's just a lousy $320, anyway. Materiality on the job is $5,000. This is nothing to get hung up on. He checked the receipt book and the daily receipts voucher to make sure that everything agreed. It was all right there in black and white. The date,November 16,2005, and amount,$320, matched perfectlywell, almost perfectly.Why was the entry in the receipt book in black ink and the envelope in blue ink? They should have been completed at the same time, he mused.

Come on, Will, you are getting hung up on details again, he thought as he began to count the money again.These bills sure are sticky; this guy must have come straight from the bank to pay this ticket. He looked closer at one of the $100 bills.Wow, this is new moneybrand new. The bills had ''SERIES 2006'' printed to the bottom right of the picture.Wait a minute, he thought,how can a cash receipt dated November 16, 2005, have been paid on that date with money printed in 2006? Will pulled on his tie. The evidence was stacking up in favor of an explanation that was making him very uncomfortable. He quickly logged the serial numbers of the bills and tried to compose himself so that he might be able to face Jess as he returned the envelope. ''Thanks, Jess. You should count this to make sure that it is all there,'' he said, forcing a smile.

Jess counted the cash. ''You are all business at work, aren't you?''

''I wouldn't want you to give me any special treatment because of our relationship.'' Will replied. Then he lowered and softened his voice. ''Is there anything else I need to know?'' He made sure to look at her directly as he paused for what seemed like an eternity. This time, the unflappable Jess seemed to be at a loss for words. The silence was broken by several rapid clicks of her pen. Then Jess brushed an invisible eyelash off of her cheek as she glanced at the calendar over Will's right shoulder and quickly composed herself. ''I can't think of anything. Let me know if you need anything at all.''

As he reached his desk, his cell phone began to ring. It was his wife. ''The day care just called and said that the baby is running a fever. I have my first meeting with a client since coming back from maternity leave. Can you pick her up? Oh, and if the baby is sick we need to cancel dinner tonight with Nacho and Jess. Can you tell her?''

Will groaned. He looked at his watch. It was just 8:45. ''I guess I can take an early lunch to get her now. I'll call my parents to see if they can watch her today. If they can't, I don't know what we'll do. Two more thingsgood luck with your meeting and you might want to give me some space for a few days. I am likely to be pretty uptight. It has been a really bad morning.''

Once he was in his truck, Will called Vince to fill him in on the morning's events. He explained the evidence that he had obtained with respect to tickets paid in cash. Vince instructed him to work on a different audit area until he could get back and assess the situation with him. Vince did not seem to be at all pleased with the news he had just received.

When Vince arrived, he and Will pulled eight more tickets that were marked as having been paid with cash. Of these, five showed the same pattern. They were marked as paid in the receipt book but were not included with the day's deposit. Nor were they included with any of the deposits made later in the week. Vince asked Will if he could think of any explanation that could help them arrive at a different conclusion than the one that was staring them in the face. Neither one of them could. They went back to the office to discuss how they were to proceed.

The Epilogue

It is Monday morning two weeks later. Will's cell phone is ringing. It is a call that he has been expecting and dreading since Jess was arrested 30 minutes ago.

''Hello, Nacho.''

''I've got just one thing to say, Will. Did she do it?''

''I can't see how she didn't, Nacho.''

Nacho's reply was direct. ''That's all I need to know.'' The line went dead.

Will knew better than to launch into a lengthy explanation. He hoped one day that he

would get a chance to explain why he did what he felt he had to do. He knew, though, that now was not the right time.

At least it is out in the open now, thought Will as he hung up. It had been the worst two weeks of his life. He had not eaten or slept regularly since the day that he found the fraud. His wife was having difficulty accepting his explanation that he was having a tough time at work. It was beginning to take a toll on her as well. She didn't know what to think of his mysterious ''job problems.'' She knew that their relationship had never been so tense. His next phone call was to his wife. As he dialed, he realized that she would be taking in all of this information for the first time herself.The ordeal was by no means over.

Two detectives and the sheriff had met with Will for three hours last Friday. He explained all of the evidence that he had accumulated over the last three weeks. He was pretty sure that they could pass an auditing exam with all of the information that he had given them. They seemed to understand and appreciate the thoroughness of the work that was done. The theft had amounted to $21,000 over two years, $3,000 more than Jess's annual salary. Will asked them if they could think of any other explanation. They could not. He knew what was coming. This was going to be big news in a small town.

The tensions continued to build over the month that passed before the trial. Jess remained adamant that she had not stolen anything. The District Attorney's investigators could not find any indication of increased wealth. If she had stolen the money, she had done an excellent job of hiding it. The entire case depended on the findings from the audit.

In the meantime, rumors began to circulate about Will. Did he have a reason to pin something on Jess? A trip to Wal-Mart to pick up diapers might produce several uncomfortable situations. He remembered the words of his auditing professor.If you need love, get a puppy. Don't expect to get it from your job. Bow-hunting season had come and gone. Nacho had not spoken to Will since their brief phone call on the day of Jess's arrest.

During the trial, Jess took the stand in her own defense. She claimed that controls were so weak that any of a number of employees could have been stealing the cash. Although she admitted to having replaced the missing $320 with her own money, she insisted that she did it because she knew she was in charge of cash receipts and wanted to save her job.

Jess maintained her innocence throughout the sentencing phase. She received a sentence of five years in jail. One week into her sentence, she broke down and admitted to the crime. One month later, the judge was convinced to release her into her family's custody. She is on house arrest between 7:00 p.m. and 6:00 a.m. for the next five years and is making regular restitution payments.

Two weeks after she returned home, Nacho and Jess invited Will and his wife over for dinner. It was an emotional evening. Jess broke down and apologized for all she had put Will and his family through. She admitted that she had a gambling addiction. She had blown all of the money in casinos on the Gulf Coast. Her life had been spinning out of control. She thanked Will for delivering the wake-up call that enabled her to take the first step toward recovery.

Class Discussion Questions

1. The key to the detection of the fraud in this case may have been Will's professional skepticism. (1) What is professional skepticism? (2) Identify specific examples of Will's exercise of professional skepticism in this case. (3) Identify conditions present in the case that could have limited Will's skepticism, and speculate as to what Will might have done if he had not been exercising professional skepticism.
2. Consider Will's independence in this case. (1) The Code of Professional Conduct does not address the issue of personal client relationships. In light of the case, do you believe that it should? (2) Compare independence in mental attitude to independence in appearance. In your opinion, was Will's independence compromised?
3. Discuss the pressures that Will faced in pursuing this matter. Discuss the pressures that auditors face, in general, in dealing with misappropriation of assets or fraudulent financial reporting.