I'm an undergrad accounting student in an introduction to forensic accounting course.I need help getting started on a final project for this class over a fictitious company called the Grand Teton Candy Company. I've found a few fraud symptoms that seem to point towards Darla Newman committing some kind of fraud involving purchasing. I have attached the overall company information as well as a picture of the list of documents I have access to (there are too many to upload all of them, but if you want to look at one in particular I will send it). Please help me to figure out what additional information to ask for in order to "prove" this fraud occurred and collect more evidence. We are only allowed to ask 19 questions, so I'm nervous to ask my professor anything.

ISSUES IN ACCOUNTING EDUCATION American Accounting Association DOI: 10.2308/iace-50763 Vol. 29, No. 3 2014 pp. 443-458 Grand Teton Candy Company: Connecting the Dots in a Fraud Investigation Carol Callaway Dee, Cindy Durtschi, and Mary P. Mindak ABSTRACT: Grand Teton Candy Company (GTCC) is considering an initial public offering (IPO). To go public, GTCC will need an audit by a large accounting firm with a solid reputation and experience in audits of IPOs. As a precursor to the formal audit, Elsie Driggs, one of the owners of GTCC, has hired her brother's CPA firm to ensure the books are in order. Her brother notices some red flags of fraud, so he forms a team of young accountants from his firm to carefully comb through his sister's records to ensure she does not have problems when the formal audit takes place. You have been placed on the team and your task is to investigate your boss' suspicions that there is fraud at Grand Teton Candy Company. You are to prepare a written report for your boss that includes the name of the fraudster(s), what he or she did, and how the perpetrator(s) benefited from the crime. Keywords: fraud detection; forensic accounting; problem-based learning; fraud triangle; red flags of fraud; brainstorming. INTRODUCTION rand Teton Candy Company (GTCC), founded by Elsie Driggs in 1983, is a boutique candy company located in Idaho's Teton Valley.1 Elsie began the company in her kitchen in the late 1970s while her husband John was starting his electrical contracting business. Elsie is an outgoing woman very involved in her community, particularly in the conservation group \"Friends of the Teton River.\" It was at bake sales to raise funds for her conservation group that her homemade candies first became a sensation. Those buying her sweets began to commission her to G Carol Callaway Dee is an Associate Professor at the University o f Colorado at Denver; Cindy Durtschi is an Associate Professor and Mary P. Mindak is an Assistant Professor, both at DePaul University. We thank Lynn Bible, Fayetteville State University; William Dilla, Iowa State University; Patricia Johnson, Canisius College; Chih-Chen Lee, Northern Illinois University; Kathy Nesper, University at Buffalo, SUNY; and David O'Bryan, Pittsburg State University for test running versions of this case and providing valuable feedback to improve it. We thank students at DePaul University, University of Colorado at Denver, Iowa State University, Northern Illinois University, and Pittsburg State University for providing valuable feedback. Supplemental materials can be accessed by clicking the links in Appendix C. Published Online: March 2014 1 All Student Handouts are available for download for ease in distribution and use in ACL, IDEA, or other programs (see Appendix C). Teacher Handouts are available in the Teaching Notes. 443 444 Dee, Durtschi, and Mindak make confections for Christmas and special occasions. By popular demand, Elsie set up a booth at the Friday Farmer's Market in Driggs, Idaho. Soon her reputation spread as tourists made a special point to stop at the small town of Driggs to pick up candy to take home. As word of her candy-making skills spread, Elsie began receiving orders from gift shops in Jackson Hole, Wyoming, as well as various retailers and merchants in the Greater Yellowstone area. As the company grew, Elsie found herself in a quandary. Her kitchen was too small for the increasing production demands and she was too busy making candy to keep up with all the financial responsibilities of operating a business. In addition, she had little time available to develop new confectionssomething she loved doing and which she felt was important to ensure the company's continued success. So Elsie asked her husband John to consider selling his business. Elsie saw this as a win-win situation: They could use the proceeds to expand her cooking facilities, John could put his business skills to work running the financial side of GTCC, and she would be free to concentrate on expanding their product lines. John, like many entrepreneurs, has a high level of risk tolerance and felt that the growth potential of GTCC was worth the financial risk. He sold his contracting business and invested the money in GTCC. With this seed money, Elsie was able to move the candy production out of her kitchen and into new facilities. Elsie has a talent with chocolate and uses only the finest organic ingredients. She specializes in producing several types of fudge and a line of huckleberry taffies, jams, and syrups. Huckleberry goods are a specialty in the region, are very popular, and have high profit margins. The company headquarters are on the outskirts of Victor, Idaho, at the mouth of Teton Canyon Pass, a little over 20 miles from Jackson Hole, Wyoming. The factory is housed in a large cream-colored metal building, shielded from view by a stand of pine, aspen, and cottonwood trees. The second floor houses the offices of Elsie Driggs, president and chief operating officer, and John Driggs, vice president and chief executive officer, along with the company's other managers and supervisors. Elsie manages daily operations on the factory floor, while John uses his business experience to direct the financial and sales sectors of the company. Elsie owns 51 percent of the stock while John owns 49 percent. This split allows the company to apply for financing and low-interest loans specifically targeted for women-owned businesses. One of John's first actions was to hire Brenda Sessions as a sales expert. Brenda has a degree in marketing from the University of Wyoming and is outgoing and fearless in contacting sales leads. Hiring Brenda paid off. Not only did Brenda expand the business among small vendors throughout the Rocky Mountain West, but she landed GTCC a huge contract with Natural Foods Supermarket, a well-known national chain. Since that initial contract, orders continued to grow, and Brenda continued courting new business at other national chains, as well. John knew that production was running near capacity already, and if they landed another big contract, they would need to expand. Elsie agrees to the need for expansion, but dislikes borrowing money. It was different during the first expansionthat growth was supported by the sale of John's electrical business. Since then, she had agreed to borrow relatively small amounts through the Small Business Administration, but even that makes her uncomfortable. Elsie feels they already have enough debt and is adamant about not borrowing more, especially since they have not yet finalized a contract with another grocery chain. John and Elsie were at an impasse until one of John's old friends, a retired accountant, mentioned \"going public.\" His friend explained that by going public, John and Elsie wouldn't have to borrow money from the bank; rather, they would have investment money from shareholders. Elsie and John could still be majority shareholders and run the company. However, some of the ownership profits would go to others who were willing to pay now in exchange for some of the future growth of GTCC. It seemed the perfect solution. As the idea grew, John plied his friend for more information. He learned that the company would need an audit and prospectus. GTCC had never been audited \\ J A m e r ic a n A c c o u n tin g A s s o c ia t io n Issues in Accounting Education Volume 29, No. 3, 2014 445 Grand Teton Candy Company: Connecting the Dots in a Fraud Investigation before, as it began as a small family business with no need to incur the expense of an audit. However, the accountant explained that if they were going to go public, they would need more professional business practices. John knew about financial statements, as he had ran his own company for years. A big payout sounded great. He liked the idea of Elsie and himself getting some of the money from their business rather than just leaving the company to their children, who didn't seem particularly interested in running the business. John convinced Elsie to consider an initial public offering (IPO) of stock for GTCC. While a public offering will allow Elsie and John to reap some of the financial rewards of their successful business, it also means a significant increase in financial and legal accountability including compliance with regulations imposed under the Sarbanes-Oxley Act. To go public, GTCC will need an audit by a large accounting firm with a solid reputation and experience in audits of IPOs. While John wants to go ahead, hire an audit firm, and get the IPO ball rolling, Elsie is cautious. She is concerned that their accounting records may not be in good enough order for a major accounting firm to begin an audit. Fortunately, Elsie's brother, Graham Greene, is a CPA in Idaho Falls. His firm, Greene and Marcus CPAs, specializes in forensic accounting. Graham offers to informally look over GTCC's accounting records to ease Elsie's concerns and make sure they are prepared for an audit. As an auditor and a forensic accountant, Graham is naturally skeptical. Although Graham knows this is supposed to be just a casual review of GTCC's books, he's protective of his sister and begins to work in earnest. While reviewing the records, Graham notices a few subtle red flags that (for any other client) would lead him to suspect fraudulent activity. Graham decides to investigate further before going to Elsie with his suspicions. Fortunately, it is summertime and the firm has some downtime. Graham assembles a team to investigate GTCC's records. You are part of this team. REQUIREMENTS Graham Greene believes that a good forensic investigation is built on instinct and experience, and he likes to remind his employees to look up from the numbers and consider the people who created those numbers. Greene and Marcus CPAs has developed a methodology that your team will follow.2 The Greene and Marcus Methodology for Forensic Accounting Investigations Step 1: Obtain an Understanding of the Company Business Environment. Consider the company's industry. Are there any challenges related to that industry that the company may face? Is the industry highly specialized or highly competitive? What are the company's competitive advantages? Is the industry in decline or growing? For example, you may obtain insight into the industry from the National Confectioners Association website: http://www.candyusa.com/ People. Because it is people who commit fraud, observe the employees and their backgrounds. Do any employees appear to have pressure to commit fraud? Have any employees exhibited changes in behavior? (Review Appendix A, \"The People of Grand Teton Candy Company,\" and Student Handout 1 (SH 1), \"Organization Chart\" [see Appendix C for the downloadable version]). 2 In some states CPAs can hold themselves out as investigators, while in other states investigators must be separately licensed. Currently, there is not a separate licensing requirement in Idaho. To find the details on licenses by state, visit: http://www.aicpa.org/interestareas/forensicandvaluationewsandpublications/advocacy/ pages/private-investigator-licensing.aspx Issues in Accounting Education Volume 29, No. 3, 2014 \\ J A m e r ic a n A c c o u n tin g A s s o c ia t io n 446 Dee, Durtschi, and Mindak Corporate Culture. Do employees have pressure to meet unrealistic deadlines or performance goals? Do staff and management have open lines of communication? Do employees feel free to discuss company problems with management, or are they more inclined to just keep quiet? (See Appendix A, \"The People of Grand Teton Candy Company\"). Business Processes. Observe the processes within GTCC. Are internal controls strong, or do they contain weaknesses that may be exploited? (See Appendix B, \"Narrative of Processes\"). Financial Statements. Examine the financial statements and look for unusual patterns. Do the ratios make sense, and do relationships between accounts seem logical? Do the financial statements appear to reflect the underlying economics of the company? Do any accounts seem unusually large or small? (See SH 4, \"Financial Statements\" [see Appendix C for the downloadable version]). General Ledger and Chart of Accounts. Review SH 2, \"Grand Teton Candy Company General Ledger,\" and SH 3, \"Chart of Accounts\" (see Appendix C for the downloadable versions). Look for unusual accounts or journal entries. Step 2: Brainstorm and Hypothesize Convene your team and conduct a brainstorming session where you share the ideas that you gleaned from your work in Step 1. For example, list the internal control weaknesses found by team members, list any individuals within the firm you feel have pressure to commit fraud, list any unusual relationships or trends noted from the financial statements, etc. Look at your lists and create fraud hypotheses. For example, what frauds could arise in an environment with the control weaknesses you found? Are any of the people you found with pressure in a position to exploit those weaknesses? If you identified red flags in the financial statements, who made the entries and is that person someone with motivation to commit fraud? Step 3: Plan the Investigation Create an investigation plan for each of your hypotheses. For example, if you saw a weakness in payroll processing, and identified ghost employees as a possible fraud, how would you investigate to determine whether the company's payroll contained nonexistent employees? What documents would you need to examinefor example, would you want to look at time cards, payroll registers, or cancelled checks? What questions would you need to ask, and to whom would you address those questions? Step 4: Execute the Plan You gather information beyond the Student Handouts by asking questions of individuals within GTCC, as well as those outside of the company. To do this, send an email to your instructor, but address it to the person from whom you require information. The requests should be very specific because you will receive exactly what you requested, even if it is not what you really needed. If you ask for useless information you will receive useless information. Remember, all the employees have jobs and are very busy. If your requests are overwhelming or not specific, they may be put in a \"to do\" basket, as would happen in a real-life situation. Each team should choose a \"corresponding investigator\" whose task is to send all inquiries from the team to the instructor. Inquiries can be sent via separate emails, through your university's course management system, or in a spreadsheet, as shown in Figure 1. The benefit to the spreadsheet is that you will have a record of your requests and responses, all in one place. You will make one spreadsheet and continue appending requests as your investigation proceeds. Note that even though you are using a spreadsheet, you must still create a proper inquiry addressed to the correct person listing the specific items you require. In the spreadsheet example shown in Figure 1, J A m eric an A c co u n tin g A ss o c ia tio n Issues in Accounting Education Volume 29, No. 3, 2014 Grand Teton Candy Company: Connecting the Dots in a Fraud Investigation 447 FIGURE 1 Example of Student Inquiry A A Inquiry 1 addressed to John Driggs 2 3 4 5 B Copy of email C Items requested or question Dear Mr. Driggs: We are working with Please send Vendor list Graham Greene to look over your accounting records. Would you please send us the following information? Thank you. Student Team 7 Please send Customer list Please send Purchase orders for boxes Who is responsible for preparing the receiving reports? the email is addressed to Mr. John Driggs and there is a request for four items. Your instructor, acting as the person to whom the inquiry has been directed (for example, John Driggs) can respond line by line by either attaching the information or typing in an answer to your request. Your next request would begin on line 6 in the example, and so on. Discuss Findings and Investigate Further Throughout the investigation, it is important to discuss progress and problems with your teammates. In complex problems like this case, discussing evidence aloud and sharing different points of views is extremely helpful. So keep open lines of communication within your team. One question you should ask throughout your investigation: does the evidence you have gathered lead to further investigation, or can you eliminate a hypothesis and focus elsewhere? Remember that fraud requires intent. Every error is not fraud. Sometimes people are just unaware of the proper way to perform a business activity or record an accounting transaction. To prove intent, you must show that someone made a deliberate, calculated action with the purpose to deceive for personal gain. Interviews At the end of the investigation period, at your instructor's discretion, your team may have the opportunity to interview your suspect(s). The objective of the interview is to obtain a confession. Interviews can take place using either a confrontational or non-confrontational approach. An example of a non-confrontational approach would be the Wicklander-Zulawski interrogation methodthat is, you let the suspect know that you know what happened and how it happened, but you want to understand why it happened (Zulawski and Wicklander 2002).3 When the suspect explains the pressure and motivation that led to committing the fraud, he or she is close to 3 For more information, go to: http://www.w-z.com/ Issues in Accounting Education Volume 29, No. 3, 2014 \\ J A m e ric a n A c c o u n tin g A s s o c ia tio n 448 Dee, Durtschi, and Mindak confessing. Be thoroughly prepared before your interview because if you know the facts of the case, you can direct the interviewee to keep on track and not give empty denials. In a more confrontational approach, you should also go into the interview completely prepared with all the facts and figures of your fraud. You should know what the fraud is, who did it, how they did it, how much money was taken, and how they stood to benefit from the crime. You should have your evidence compiled as if you were presenting it in court to persuade a jury. In this approach, you present your case to the suspect and give him or her no room to do anything but confess. No matter the approach taken in the interview, come prepared with a written \"confession\" that the suspect can sign if you induce a confession. The suspect will generally not confess unless you have shown that only he or she has committed the crime. To show this, you must accurately describe what the suspect did and how much money was involved. You must show the suspect benefited from the crime and had the opportunity, ability, and intent to commit the crime. Include this confession in your final report. Final Report At the conclusion of your investigation, you will prepare a final report for your firm. This report will include: 1. A brief statement of your conclusion (fraud or no fraud at GTCC). 2. If a fraud or frauds have occurred, you will present the following for each fraud: a. b. c. d. e. Identification of the perpetrator; Description of the fraud; Evidence of the pressure or motive the perpetrator had to commit the fraud; Evidence the perpetrator had the opportunity and knowledge to commit the fraud; Evidence of the perpetrator's intent. That is, you must show that the perpetrator's actions were not simply a mistake or ignorance that resulted in the fraud, but a deliberate action; f. Evidence of how the perpetrator benefited from the crime; g. The dollar amount of the fraud; and h. The perpetrator's confession, if you obtained one. You will be graded not only on the content of your report, but also on its organization, presentation, clarity, and writing style. Neatness, grammar, spelling, and punctuation are important. This is a competitive exercise where your findings will be compared to the findings of other teams in your class. Therefore, it is imperative that your team keep your leads and solutions private, so unfair advantage is not given to other teams. REFERENCES Zulawski, D. E., and D. E. Wicklander. 2002. Practical Aspects of Interview and Interrogation. New York, NY: CCR Press. APPENDIX A The People of Grand Teton Candy Company This weekend, you go for a relaxing evening at the local Concert in the Park in downtown Victor, Idaho. It is a cool evening, children are mnning about playing, and nearly the entire community is there lounging on lawn chairs and blankets. While you have come to listen to the A m e r ic a n A c c o u n tin g A s s o c ia t io n Issues in Accounting Education Volume 29, No. 3, 2014 Grand Teton Candy Company: Connecting the Dots in a Fraud Investigation 449 music, you notice there seems to be little listening as the locals spend the evening exchanging desserts and talking with each other. You set up your folding chairs near the back of the park and settle in to enjoy the evening. Shortly after you arrive, Randy \"Spud\" Squire, his wife Julia, and two rambunctious boys arrive and lay a blanket down on the ground next to you. You recognize Spud as being the lead taffymaker at GTCC. Although you haven't had many occasions to interact with him because your work is focused in the business offices, he greets you with a smile and says \"Hello.\" As you enjoy the evening and the music, Spud talks about the people in the company. Recognizing this as an opportunity to gain insight, you gently encourage him to keep talking. This is what you learn. Spud hopes to make GTCC his life's work. After being raised on a farm, it suits him perfectly to have a job where there is no weekend or holiday work and he can go home at six PM each day to enjoy his family. He's an avid outdoorsman who enjoys fishing, hiking, and camping in the summer, and snowboarding and snowmobiling in the winter. Spud says that Elsie and John project a happy marriage to the workers in the company. Although the company was started by Elsie, John has taken over many of the business office functions since his arrival as a full-time employee. In Spud's opinion, Elsie is relieved to have John step into that role so she can focus on the candy-making. Elsie spends the bulk of the day in the kitchens and personally supervises much of the candy-making. Her corrections are always gentle and she has a laugh that carries across the factory floor. John is more somber and firm, but everyone respects him. Spud believes that John is the one pushing for going public as his way to put his mark on the company. He is curious as to your opinion of how much money John and Elsie will make from selling part of their company and what going public might mean for the workers. Spud's wife Julia tells you that Elsie and John's daughter Meredith graduated from Idaho State University in Pocatello, Idaho, with a Master's degree in accounting. Although Meredith is the Vice President of Accounting and Finance at GTCC, Julia believes she has no desire to take over the candy company. When Meredith talks about the future, she talks about opening her own CPA practice when her children are a little older. Julia tells you that over the last several years, Meredith has worked mostly from home, only coming into the office a few afternoons per week, so she can care for her young girls (triplets!) during the day. Spud interrupts to say Meredith does come into the office nearly every day to check on YeeLing, who is directly under her management, and to sign checks if needed. Meredith and her husband own a dairy farm (Wilson Dairy), but to avoid a conflict of interest they do not sell their milk to GTCC. Spud tells you that Brenda Sessions, the manager of sales, packaging, and shipping, also handles the accounts payable, preparing the checks after she has the purchase orders, sales invoices, and accompanying paperwork together. Brenda is very dedicated to her job and has a very outgoing personality. Spud credits Brenda with the new lucrative contract with Natural Foods Supermarkets, which has allowed the company to grow and gave everyone some employment security. Spud also mentions Darla Newman, the manager of purchasing, receiving, and inventory, who also handles accounts receivable. He went to school with Darla and says she was always very popular, and one of the prettiest (and smartest) girls at Teton Valley High School. She graduated at the top of her class and was the school's valedictorian. Spud mentions that Darla's family has always been close to the Driggs familyDarla's mother was Elsie's best friend, and Darla has been at the company since she was 22. You learn that Darla went away to college at Utah State University and ended up getting married to a local boy during her senior year at college. After graduation, she moved back to Teton Valley. Spud tells you that Darla's husband, Max, grew up in Driggs, and his parents owned and ran the local hardware store. Max is very handy, and had some money saved from working at his Issues in Accounting Education Volume 29, No. 3, 2014 \\ J A m e r ic a n A c c o u n tin g A s s o c ia t io n 450 Dee, Durtschi, and Mindak parent's store, as well as holding down construction jobs in the summer. He used this money, along with money borrowed from his family, to buy John Driggs' electrical contracting business when John decided to sell. Originally, Max grew the business, and at one point employed ten workers, but unfortunately, because of recent problems in the housing market, he has had to lay off all his employees. Max is upbeat, however, and says that they will be hired back when building picks back up again, as he is certain it will. In the meantime, Max keeps the business afloat by doing electrical repairs throughout the valley. Hank Alden is the supervisor of the shipping and packaging crew. The crew works mostly at night, packaging all the candy made during the day and getting it ready for shipping. Some of the candy is shipped in bulk, while some is shipped packaged in boxes for sale to consumers. All shipping is done via UPS and shipments are made nearly every day. Hank takes great pride in his work and knows how important it is to Elsie that all packaging is perfect, so the candy arrives fresh and in good condition to their customers. Hank stays in the warehouse to the early morning to ensure that all packages are picked up properly. He also works weekends at the local bar and grill as a bartender. Deidre Hatch is the supervisor of the receiving crew. Spud tells you Deidre is always in early to catch the morning deliveries. There are many deliveries throughout the day because Elsie insists on fresh ingredients (especially the fruit). Deidre is the marshal of the receiving room, and although she isn't a lot of fun, she seems to run a very tight ship. Some of the local farmers don't like Deidre because she is so particular about quality and is not shy about turning away a shipment if she doesn't feel it comes up to GTCC standards. Deidre was personally trained by Elsie, and was one of the first people hired in the company to do the receiving while Elsie directed the cooking. Randy Sanderson and Ginny Nelson are drivers. They are in and out of the factory all day, often bringing in ingredients directly from vendors when supplies are needed quickly. They alternate days at work. Ginny also works at the local supermarket, while Randy works at a pizza restaurant in Jackson Hole on his days off. At your urging, Spud talks about Grant Wood and Consuelo Villarreal, who are the other lead candy-makers in the business. It is obvious Spud and Consuelo are friends while there is some tension with Grant. When probed, Spud just says the bad blood goes back to grade school days when Grant used to bully him. He does say, with some satisfaction, that Elsie more often reprimands Grant than either himself or Consuelo, even though Grant has worked there longer. Spud wouldn't mind seeing Grant move on to something else. Grant used to work in construction, and Spud hopes when the real estate market picks up he goes back to it. Spud mentions how he himself enjoys the cooking and hopes at some point he gets to be the lead in both the fudge and jelly and syrup divisions. Spud doesn't really know Diego Martinez, the night shift manager. Diego supervises Alfonso Davis, who runs the maintenance and cleaning crews at night. Diego has only been working at the factory for six months and usually arrives sometime after Spud leaves for the evening. Spud believes Diego does an excellent job, as the place has been spotless since Diego took over. The evening ends and you bid Spud and his family good night. Spud gathers up his two boys, who look exhausted from a night of running and laughing with the other children in the park, and heads to his car. You head back to your motel ready for another round at Grand Teton Candy Company tomorrow. l / \\ ^ 7 l A m e r ic a n A c c o u n t in g A s s o c ia t io n Issues in Accounting Education Volume 29, No. 3, 2014 Grand Teton Candy Company: Connecting the Dots in a Fraud Investigation 451 APPENDIX B Narrative of Processes Purchasing Elsie personally trained Darla Newman in purchasing. While Elsie trusts Darla, she still cannot resist coming down to the receiving room to be in the presence of the fresh fruit and ingredients. The primary product ingredients are cocoa, chocolate, sugar, butter, cream, and vanilla, along with a variety of nuts and fruits. Elsie has always been very particular about the ingredients in her candy and feels they are the basis for the company's success. Despite the costs, Elsie insists that they use only the finest organic ingredients, and if products are not in prime condition (such as slightly stale nuts or over-ripe huckleberries), they are discarded and never used. While Elsie still visits the receiving room, she has grown to trust Darla's judgment in choosing suppliers completely. Darla earned that trust by spending long hours on the phone finding suppliers for the ingredients; she favors organic family farms, especially when she can get a good deal. Darla often travels to visit the farms, sometimes spending weekends away to visit distant suppliers, to ensure that the farms actually practice the principles of organic farming. Darla often tries out new suppliers on a temporary basis by giving them small orders to test quality consistency and delivery reliability. Once Darla is convinced of a supplier's quality, she adds them to GTCC's approved vendor list. Darla creates purchase orders to send to the vendors, basing the size of the purchase on the sales order flow. It is not hard to anticipate the order flow, as most of their customers have longstanding relationships and their orders are fairly consistent. At the time she creates the purchase order, the computer system creates a related receiving report. Darla walks the receiving reports to Deidre Hatch, who keeps them in a file until the order is received. Receiving When orders are received, Deidre and her crew check them for quality and completeness of the order. Deidre and her crew are well trained in examining and sampling produce to ensure its freshness. They record the items received on the receiving report supplied by Darla. Generally, there is an invoice delivered with the order. If the order is complete, Deidre returns the completed receiving report and the invoice to Darla. Darla checks that the purchase order, receiving report, and invoice match, staples the three papers together and walks them all to Brenda Sessions. Accounts Payable Brenda Sessions again checks that the purchase order, receiving report, and invoice match, then creates a check to pay the invoice. Payment is usually made within 30 days, and Brenda is careful and organized to ensure there are no late payments or penalties. Once the check is created, Brenda carries the check, invoice, purchase order, and receiving report to Elsie Driggs or John Driggs for signature. After the checks are signed, they are returned to Brenda, who mails them. Inventory John himself counts the inventory at month-end and creates the COGS journal entry. John calculates COGS each month using the following periodic method formula: Beginning Inventory + Purchases = Cost o f Goods Available fo r Sale Ending Inventory from Physical Count = Cost o f Goods Sold. Issues in Accounting Education Volume 29, No. 3, 2014 A m e r ic a n A c c o u n tin g A s s o c ia t io n 452 Dee, Durtschi, and Mindak Darla creates a spoilage report each month, as she is assigned to check the warehouse on a daily basis and remove spoiled food. Sales Brenda Sessions is also the Sales Manager. Among her other responsibilities, she maintains close ties with the customers and always tries to find ways to promote the business. Recently, she obtained a contract for GTCC with a national natural food chain. Despite the fact that the company is growing and developing a broader customer base, Elsie insists on keeping the local customers happy, as they are the ones who helped the business grow from a small start-up in her family kitchen. Brenda makes the sales, and then supervises the packaging and shipping. Candy is delivered to the customers by UPS. Sale payments are due 30 days after the invoice is issued. Brenda is trying to expand sales to other national chains, as well as the national and state park service gift shops. She feels their brand of natural candies is perfect for selling to tourists across the country, as it has been so successful in that market among the tourists in the Mountain West. One of the latest promotional exercises (the brainchild of John) is to give customers free shippinga savings of $0.20 per pound on their orders. GTCC has been running this promotion since the first of the year. Accounts Receivable and Cash Receipts Darla is in charge of customer accounts receivable. The mail is opened by Yee-Ling Chang. She prepares a cash control list of the day's checks received, and then delivers the checks and the cash control list to Darla. Darla credits the proper customer accounts, creates deposit slips, and deposits the money in the Grand Teton Bank on her way home from work each day. Payroll Yee-Ling Chang is responsible for payroll. There is a time clock on the factory floor and each employee clocks in after arriving at work. At the end of each week, supervisors collect and verify the time stamps done by employees. The supervisors then deliver the time cards to Yee-Ling. YeeLing calculates the payroll based on the time cards. Elsie Driggs approves the payroll, and then Brenda Sessions prepares the checks and mails them to the employees. Money is transferred from the operating cash account to the payroll cash account from which the employee checks are drawn. Travel When someone travels on company business, they mm in all receipts to Yee-Ling Chang. She creates a travel report, attaches the receipts, and passes the completed report on to Meredith Driggs, who approves the travel. Once the travel is approved, she passes the voucher on to Brenda Sessions, who prepares the necessary checks and forwards them to John or Elsie to sign. Reimbursement policies include $0.60 per mile for the use of personal vehicles. When a rental car is used, Yee-Ling looks up the mileage from the airport to the destination and reimburses for an average of $4.00 per gallon, assuming the rental car gets 20 miles per gallon. This is a policy instated by John Driggs so employees who want to use the rental for their own use while on company business can't charge GTCC for gas reimbursement for that personal use. Company policy is to stay at inexpensive motels near the site of the official visit. All airfare is booked electronically at the lowest fare available, while cars are rented from Budget Auto Rental. Travelers are provided $60 per day for meals, plus reimbursement for client meals. At one point, John had Yee-Ling booking all the travel arrangements. However, both Darla and Brenda complained that working through Yee-Ling added unnecessary steps and confusion to a J A m e ric a n A c c o u n tin g A s s o c ia tio n Issues in Accounting Education Volume 29, No. 3, 2014 Grand Teton Candy Company: Connecting the Dots in a Fraud Investigation 453 process they could handle themselves. John reversed his policy and now traveling employees make their own travel arrangements, knowing that John will check to ensure they have used the proper suppliers for hotel, air, and rental cars. APPENDIX C Student_Handouts: http://dx.doi.org/10.2308/iace-50763.sl Issues in Accounting Education Volume 29, No. 3, 2014 A m e r ic a n A c c o u n tin g A s s o c ia t io n 454 Dee, Durtschi, and Mindak CASE LEARNING OBJECTIVES AND IMPLEMENTATION GUIDANCE Introduction and Purpose The Grand Teton Candy Company (GTCC) Case was developed to provide students with realistic experience in fraud detection. In-depth company information and financial data are provided in the case to simulate a real-world situation. There are three main objectives for this problem-based learning (PBL) case. Students will: 1. detect and investigate several different types of fraud; 2. use the fraud triangle to uncover evidence of the pressure, opportunity, and rationalization typically present when fraud occurs; and 3. follow a specific methodology to develop reliable and relevant evidence against the perpetrator. Importance of Taking a Larger View Accounting students and, thus, new auditors often focus solely on numbers when doing an audit. To best detect fraud, they need to be reminded to take a larger view. Students must realize that while accounting records can contain evidence of a fraud, numbers cannot be prosecuted. To detect fraud, one must also examine people, because it is peoplewith their pressures, motivations, and rationalizations who commit fraud and then try to conceal it among the accounting records. Students also need to look at the accounting numbers in context, whether it is the industry in which the firm operates or the professional atmosphere within the firm, as these could provide motivations for fraud. In addition, students (like auditors) do not have unlimited time. They need to distinguish between errors and fraud and learn how to let go of an unproductive investigative path. Through the detail provided in the case materials, students will learn to not only analyze the numbers, but to see the bigger picture and evaluate nonfinancial data as well. Importance of a Forensic Methodology When an accountant is charged with investigating or detecting a fraud, the evidence gathered and testimony supplied can have a significant impact on the outcome of a fraud case. In addition, challenges can be brought against an expert's testimony. To withstand a possible challenge by opposing counsel, the forensic expert must have solid and reliable evidence to support any findings, and show that his or her methodology and reasoning are valid and can be applied to the facts of the case. Thus, it is important that forensic analysis be conducted in a methodical, thoughtful, thorough way that can be defended in court.4 One objective of this case is to teach students to conduct their investigations in such a manner. 4 In Daubert v. Merrell Dow Pharmaceuticals, Inc. (1993), the U.S. Supreme Court established a new set of criteria for the admissibility of scientific expert testimony. With its ruling in Kumho Tire v. Carmichael (1999), the Court extended the general principles of Daubert to include non-scientific expert testimony, such as that from accountants. The Federal Rules of Evidence (2012) have been modified to incorporate the Daubert decision. Under these new rules, a witness who is qualified as an expert may testify in the form of an opinion if the expert's testimony meets the following standards: the testimony is based on sufficient facts or data, the testimony is the product of reliable principles and methods, and the expert has reliably applied the principles and methods to the facts of the case. Failure to meet these standards by the expert gives opposing counsel the opportunity to try to exclude the expert's testimonya \"Daubert challenge.\" In a Daubert challenge, a hearing is conducted before the judge where the validity of the expert testimony is contested by opposing counsel. J A m e r ic a n A c c o u n tin g A s s o c ia t io n Issues in Accounting Education Volume 29, No. 3, 2014 Grand Teton Candy Company: Connecting the Dots in a Fraud Investigation 455 Fraud Hypotheses Development In this case, we present a strategy for students to follow that will allow them to develop fraud hypotheses to help them conduct a thorough examination of the frauds. The students are led through a series of steps that we explain in the case materials and supplement here. Step I: Obtain an Understanding o f the Company In this step, students examine the company's business environment, people, corporate culture, business processes, and financial records. For example, when considering GTCC's business environment, students should note the seasonal nature of a candy company's salesmore sales are common around Valentine's Day and Christmas. When observing the people, students should focus on the fraud trianglethat is, which individuals have motivation, opportunity, and a grievance that might cause them to rationalize fraudulent behavior? By examining the business processes, students can identify internal control weaknesses that may be exploited. Students are directed to examine the financial statements to see whether financial ratios and other analyses contain unusual patterns.5 Finally, we ask students to review the General Ledger and Chart of Accounts to look for suspicious accounts or unusual journal entries. Step 2: Brainstorm and Hypothesize The purpose of the brainstorming session is for students to share with their teammates the red flags they have individually noticed and develop them into possible fraud scenarios. For example, students might have identified individuals with pressures or rationalizations to commit fraud; discovered unusual patterns in financial ratios, odd accounts, or journal entries that do not make sense; or recognized internal control weaknesses. Once student teams have a complete set of facts, they can combine them to hypothesize who might have committed what type of fraud. For example, if there were lax controls in payroll, and the payroll clerk, \"Susan,\" had a grievance with the company, a student fraud hypothesis might be \"Susan puts ghost employees on the payroll.\" At this point, the hypotheses are broadly stated because students have not yet begun to investigate the frauds. As student teams gather evidence, they will fine-tune their hypotheses to narrow down the suspect or suspects and the methods used to commit the frauds. Step 3: Plan the Investigation Next, student teams determine how they will investigate each of the hypotheses. In the ghost employee example, students might choose to match payroll checks to personnel records of current employees, investigate whether any checks were sent to identical addresses, and verify with other employees the identity of persons to whom suspicious payments were made. Students can then delegate tasks outlined in the investigation plan to different team members and begin gathering data. Step 4: Execute the Plan Students send inquiries to the instructor (addressed in the \"Case Implementation Guidance\" section). We encourage students to discuss their findings with teammates throughout the investigation phase. Experience shows that teams solve more frauds than do individuals working alone. We remind students that fraud requires intentdeliberate, calculated, knowing actions taken by the perpetrator who means to deceive and that they may find errors that are not indicative of 5 For a thorough discussion of using financial statement analysis to detect fraud, see Schilit and Perler (2010). Issues in Accounting Education Volume 29, No. 3, 2014 A m e r ic a n A c c o u n tin g A s s o c ia t io n Dee, Durtschi, and Mindak 456 fraud. At this point, it is important that students drop hypotheses that lack supporting evidence and turn to other areas of concern. Case Implementation Guidance6 This case uses the Problem-Based Learning (PBL) methodology. In PBL, students are given a complex problem in a real-world setting. They are not initially given enough information to solve the problem, but must look for additional information outside the case materials. PBL was originally used in medical schools, where medical students were introduced to a patient presenting a set of symptoms and students had to investigate further using outside sources to diagnose and prescribe treatment. PBL lends itself to teaching fraud examination because in a real investigation, students will never find all the evidence needed to come to a conclusion of fraud in a neat package within the books of the company. Instead, students must use outside sources to confirm or deny their suspicions.7 To use the case, instructors create teams of three to five students. Some instructors assign groups while others allow students to choose group members. We recommend that each team be graded relative to the other teams; therefore, instructors must emphasize to students the importance of keeping their team's information and line of investigation private. We usually allow three weeks to complete the case, although it varies among instructors from two to four weeks. Teams begin their investigation by following the four steps outlined in the student case materials. To ensure that students are following the steps, instructors can require the teams to turn in their fraud hypotheses for grading in the first week of the case. The hypotheses should indicate the possible perpetrator, internal control weakness, and type of fraud. The hypotheses are not graded for accuracy as the students have not yet begun to collect evidence, but can be graded for thoughtfulness and evidence of creative brainstorming among group members. Answering Inquiries The bulk of student learning in the case occurs during the interaction with the role-playing instmctor. Students must ask for materials needed to test their fraud hypotheses because in this PBL case, students are not initially provided all materials needed to solve the case. Each team chooses a \"corresponding investigator\" who sends all email inquiries to the instructor, but addresses the body of the memo to the appropriate person at GTCC. The student copies his or her team members on the inquiry. By doing so, the instructor can answer via \"Reply All\" and, thus, each team member receives the response. Using a corresponding investigator makes it easier for the instmctor to keep track of each group's progress and also requires students to work together to solve the case. Alternatively, secure groups can be set up in the school's online course management system and all correspondence from the instmctor can be posted to the appropriate group. While the students are provided voluminous case materials, we emphasize that the instructor does not need to become familiar with all of these documents only the documents that indicate fraud. The Teaching Notes contain solutions, as well as student teams' typical lines of investigation and suggested responses to student inquiries. Because of the nature of the frauds included in this case, the teacher handouts (i.e., information needed from sources outside the GTCC documents provided to the students) are not excessive. 6 Excel versions of all Teacher Handouts are available for download in the Teaching Notes. The Excel files can assist in answering student questions and facilitate the use of IDEA or ACL to analyze the data. 7 For more information on the use of PBL in the accounting classroom to teach fraud detection, please see Durtschi (2003) and Dee and Durtschi (2010). A m e r ic a n A c c o u n tin g A s s o c ia t io n Issues in Accounting Education Volume 29, No. 3, 2014 Grand Teton Candy Company: Connecting the Dots in a Fraud Investigation 457 TABLE 1 Results of Student Survey Question 1. Was it helpful to have steps outlined at the beginning of the case to help you get started? 2. Was it helpful to work in a team during your brainstorming sessions (for example, were there people who thought of things you hadn't, or found clues in the books you did not find)? 3. Were the brainstorming sessions helpful in organizing your information and creating hypotheses? 4. Were the instructions on intent helpful in distinguishing between error and fraud? 5. Were the case materials helpful in helping you follow the suggested steps? 6. Were any of the perpetrators your team identified in your initial brainstorming session shown to be the actual perpetrators? 7. Were any of the frauds your team identified in your initial brainstorming session shown to be the actual frauds? 8. Did your team have difficulty distinguishing between errors and fraud? n Mean 53 1.80 2 to 3 3 53 2.21 3 -3 to 3 53 1.94 2.25 to 3 3 40 0.91 1 to 3 3 12 0.29 1 to 3 3 53 94% yes 52 88% yes 36 69% yes Median Range Student responses for Questions 1 through 5 were on a seven-point Likert scale, ranging from being \"very 3, unhelpful,\" to 3, being \"very helpful.\" Questions 6 through 8 were yeso questions. Sample size varies between questions because we used two different questionnaires and some students did not answer all questions. The most time-intensive part of the case for the instructor is responding to these student inquiries. To reduce the burden, we recommend limiting the time given to solve the case to three weeks. We find that the use of the corresponding investigator greatly reduces the burden on the instructor, as it eliminates duplicate inquiries from the same team and forces teams to work together in a thoughtful, coordinated manner.8 We also recommend to students that they make inquiries via an Excel spreadsheet, which further discourages duplicate requests from the same team. Classroom Experience The case has been used in both graduate forensic accounting courses and graduate auditing courses that included a forensic accounting module. Table 1 presents results from student surveys. In these surveys, we asked students questions about the methodology used to solve the case and how helpful they found it to be. Sample size varies between questions because the questionnaires differed slightly and some students did not answer all questions. Questions 1 through 5 are on a seven-point Likert scale (-3 = very unhelpful, +3 = very helpful). Question 1 shows that students found the case steps helpful in getting their investigation started (mean = 1.80, median = 2). Questions 2 and 3 show that students felt brainstorming in a group was helpful (mean = 2.21, median = 3), and that brainstorming helped them to organize their information and create 8 For additional suggestions on managing instructor workload, see Dee and Durtschi (2010). Issues in Accounting Education Volume 29, No. 3, 2014 l A \\ l A m e r ic a n A c c o u n tin g A s s o c ia t io n 458 Dee, Durtschi, and Mindak hypotheses (mean = 1.94, median = 2.25). Question 4 indicates that students felt the instructions were somewhat helpful in distinguishing between fraud and error (mean = 0.91, median = 1). Questions 6, 7, and 8 were yeso questions. Ninety-four percent of students identified a perpetrator during the brainstorming sessions who was ultimately shown to be an actual perpetrator, while 88 percent of students identified a fraud during brainstorming that turned out to be one of the actual frauds. Question 8 shows that 69 percent of students had difficulty distinguishing between errors and fraud. Overall, the student surveys support the positive feedback that we received from performing this exercise in various classes. The first set of questions provides evidence that using the hypotheses development methodology helped students focus their analysis. The second set of questions provides evidence that students were successful in identifying a perpetrator and fraud using the hypotheses strategy. Finally, as the surveys were given to students running the case in its testing version, we incorporated many suggestions given by students and instructors into the case. TEACHING NOTES Teaching Notes are available only to non-student-member subscribers to Issues in Accounting Education through the American Accounting Association's electronic publications system at http:// aaapubs.org/. Non-student-member subscribers should use their usernames and passwords for entry into the system where the Teaching Notes can be reviewed and printed. Please do not make the Teaching Notes available to students or post them on websites. If you are a non-student-member of AAA with a subscription to Issues in Accounting Education and have any trouble accessing this material, then please contact the AAA headquarters office at info@aaahq.org or (941) 921-7747. REFERENCES Daubert v. Merrell Dow Pharmaceuticals, Inc. 509 U.S. 579 (1993). Dee, C. C., and C. Durtschi. 2010. Return of the Tallahassee beancounters: A case in forensic accounting. Issues in Accounting Education 25 (2): 279-321. Durtschi, C. 2003. The Tallahassee beancounters: A problem-based learning case in forensic auditing. Issues in Accounting Education 18 (May): 137-173. Federal Rules of Evidence. 2012. Available at: http://www.uscourts.gov/uscourts/rules/rules-evidence.pdf Kumho Tire Co., Ltd. v. Carmichael. 526 U.S. 137 (1999). Schilit, H., and J. Perler. 2010. Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports. 3rd Edition. Boston, MA: McGraw-Hill. A m e r ic a n A c c o u n tin g A s s o c ia t io n Issues in Accounting Education Volume 29, No. 3, 2014 Copyright of Issues in Accounting Education is the property of American Accounting Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use