INTRODUCTION

The Royale Wedding Venue is a banquet facility capable of servicing about 300 people. The Venue specializes in wedding receptions, graduations, religious ceremonies, etc. The Venue's business comes from KL's educational, political, and private organizations. The Venue has a modern kitchen, stage for live entertainment, dance floor, and several large rooms with audiovisual facilities. Annual revenues total approximately RM900,000, and there are seven full-time employees. The Venue was built by a renowned rich Family, and has never had problems attracting business. However, profitability and cash flow difficulties have arisen in the last few years to a point where the Family's funds were needed to support the Venue. The Family assumed that profitability difficulties were caused by incorrect pricing, yet the prices charged by the Venue were comparable to those of its competitors. Melissa is the General Manager of the Royale Wedding Venue. Melissa is an attractive 35-year-old college graduate with a degree in management, and she has been the manager for the last six years. The Family believed that Melissa's "take charge" style was an asset in keeping everything under control at the Venue. Melissa is a "people person," and she has a special talent for pleasing the Venue's clients and customers. Melissa's greatest asset is her ability to attract and retain new business. However, Melissa also had a dark side to her personality, and Venue employees knew that she demanded absolute obedience. Any employee who failed to follow to Melissa's expectations or questioned Melissa's directives was promptly terminated. As general manager, Melissa had complete control over all aspects of the Venue. She was in charge of hiring, selecting vendors and contractors, the day-to-day operations at the Venue, and all recordkeeping and funds management. Some of the Venue employees, customers, vendors, and contractors had some relationship with Melissa, and there was a general culture of trust between Melissa and the Family. Accordingly, Melissa had a "free hand" to run the Venue without any interference from the Family.

THE NEW ACCOUNTANT

Azhar was member of the Family and he was personally responsible for hiring Melissa as the general manager of the Venue. After considerable discussion with other Family members, Azhar decided it would be wise to separate the managerial and accounting responsibilities of the Venue by hiring a full-time accountant. Azhar reasoned that the profitability difficulties of the Venue were due to Melissa spreading herself too thin by trying to personally manage all aspects of the Venue. Azhar also reasoned that Melissa was a first-rate manager, but she was not an accountant, and perhaps this lack of accounting knowledge was one of the underlying causes of the Venue's profitability difficulties. Accordingly, hiring a new accountant would allow Melissa to focus on her true talents relating to marketing and managing the Venue, while the new accountant would focus on the proper pricing of the Venue's services. Additionally, hiring a new accountant would eliminate the need for any external accounting services that were being performed by a local Accountant. This local Accountant compiled unaudited financial statements for the Venue from the financial information prepared by Melissa. When Azhar met with Melissa to tell her about the Family's decision to hire a new accountant, Melissa strongly objected. Melissa explained that she had taken an accounting course in college, and the money used to hire a new accountant would be better spent on radio and television advertising. Melissa assured Azhar that the profitability difficulties of the Venue could be alleviated by bringing in new business at higher prices. Azhar countered by explaining that the salary of the new accountant would be almost entirely offset by the savings from not having to employ an outside Accountant. After much discussion and hard negotiating, Melissa agreed to the hiring of a new accountant providing that he or she reported directly to Melissa. In three weeks, Sara was hired as the Royale Wedding Venue's new accountant. Sara is an accounting graduate from a local university, and this was Sara's first full-time accounting position after graduation. Azhar made the final decision in hiring Sara, but per the previous agreement, Sara reported directly to Melissa. Azhar explained to Sara that Melissa was her immediate supervisor, but she could always come and talk to him if there were any problems between her and Melissa. From the very beginning, Sara could tell that Melissa considered her a spy. Melissa's behavior was polite and businesslike, but it seemed as though Melissa was still holding on to the most important accounting records. The duties assigned to Sara were mostly customer and vendor data entry in Microsoft Access. Sara noticed that Melissa controlled all cash deposits and disbursements as well as the supporting accounting records and bank reconciliations. Sara volunteered to accept wider responsibilities by managing the accounting records, but Melissa declined her offer, and continued to assign her data entry and clerical duties. However, Azhar insisted on receiving financial reports directly from Sara, so over time, Sara gained access to more and more of the accounting records. Yet, the accounting information available to Sara came directly from Melissa.

THE ANONYMOUS TIP

After working at the Venue for three months, Sara received an anonymous letter accusing Melissa of stealing Family funds. The letter contained enough details about Venue activities to imply that its author had to be an employee of the Venue. Sara decided to take the letter and her suspicions to Azhar.

Azhar was reluctant to accept the anonymous letter's charge. Yet, he was disturbed that his directive requiring the separation of accounting and management at the Venue was being ignored by Melissa. Azhar and Sara talked for about two hours regarding Melissa's complete domination of the Venue. Azhar asked Sara if she thought Melissa was stealing. Sara paused for a moment, took a deep breath, and said yes. Azhar's eyebrows raised, and he asked if she could prove that Melissa was stealing. Sara said no, but she knew of someone at the university who specialized in this type of situation. Azhar was reluctant to bring in an outsider, but Sara explained that she knew this person well (a fraud examiner), and he could be trusted to operate within the discretionary limits of the Family. Azhar agreed to meet secretly with Sara and Kamal to discuss the situation at the Venue. Kamal is a Certified Fraud Examiner who teaches fraud examination at the local university. Azhar explained the need for a quiet investigation, and that any findings of impropriety must be kept in strictest confidence. Kamal cautioned that the need for secrecy might render his findings inconclusive. Azhar indicated that he would approve a wider investigation if there were proof that Melissa was a thief, but until that time, the investigation must be kept secret. Kamal agreed to the terms of the engagement.

THE INVESTIGATION

The investigation began with a meeting between Kamal and Sara in Kamal's office at the university. Sara was working on her master's degree by taking evening classes, and this created an ideal meeting place that would be undetectable by Melissa. Sara prepared an outline of the accounting and cash handling procedures at the Venue, along with copies of the monthly financial statements for the past two years. Additionally, Sara prepared a gross profit analysis for each set of financial statements. The gross profit percentage fluctuated 15 to 20 percentage points from month to month. Kamal asked how prices were determined for Venue activities, and Sara replied that Melissa set the prices, but she never revealed the method used for pricing. Kamal ended their first meeting by requesting copies of the following information for the last two years:

1. Royale Wedding Venue bank statements.

2. Royale Wedding Venue's calendar of events.

3. Customers receipts.

4. The cash receipts and cash payments journal.

5. The payroll register.

After Sara left, Kamal went to his computer to search the Internet for public records on Melissa. The website of KL's real estate agency showed Melissa's villa address along with a description of her property. Kamal searched for any legal documents involving Melissa. Kamal noted that Melissa had been unable to meet her mortgage payments on her property five years earlier, but the legal proceedings were terminated for some unspecified reason. Kamal decided to drive by Melissa's residence to see firsthand the current construction project. Melissa's villa was well maintained with professional landscaping and elaborate flower gardens bordering all sides of the house. The Villa got an in-ground big swimming pool in front of a modern building. A landscaping service was there cutting the lawn, and Kamal could see several pieces of large excavating equipment working in the backyard. Kamal also noticed a late-model, silver Mercedes sedan parked in the attached garage. Until now, all of the information gathered by Kamal was free and publicly available. However, he decided to use a commercial records database to examine Melissa's credit record. Such databases are available for professional fraud investigations. The bank's foreclosure proceedings were listed on her credit record, but her current credit rating was good. Also listed was an automobile loan for the Mercedes sedan that Kamal saw in the garage. In the meantime, Sara was having difficulty getting the documentation requested by Kamal. With the exception of the calendar of events, all of these documents were kept under lock and key by Melissa. Sara went to Azhar for assistance. Azhar and Sara went to the bank and secured copies of the Royale Wedding Venue's bank statements without difficulty. Azhar also had a master key that would open any door at the Venue, and he and Sara entered the Venue in the evening when the parking lot was empty. When Azhar tried to unlock the door to the records room, his master key would not work. Sara said she recalled seeing an invoice from a local locksmith just after she was hired. The next day, Azhar called the locksmith, and the locksmith confirmed that he had changed the locks on two doors at the Venue on the orders of Melissa. The locksmith prepared a duplicate key for Azhar, and the next night Azhar and Sara entered the previously inaccessible rooms of the Venue. Using the copy machine, they made copies of the records requested by Kamal.

The following week, Sara and Kamal spent an evening examining the Royale Wedding Venue's records. They noticed that the timing of bank deposits did not match the calendar of events. Frequently, there was a delay of two to four weeks between the time a Venue event occurred and the time the corresponding funds were deposited at the bank. There was also the revelation that some carbon copies of customers receipts were significantly larger than the corresponding bank deposits.

Approximately 75% of the customers paid by check, and the remaining 25% paid with cash. The cash payments journal showed cases of multiple payments to contractors for the same invoice. In several instances, payments to food vendors seemed excessive for the number of persons served at a given event. The payroll register showed recent paychecks issued to persons that Sara did not know. Kamal prepared a written report documenting the recordkeeping anomalies at the Venue along with his observations regarding the bank foreclosure, swimming pool, and Mercedes. The following week, Kamal met with Azhar and Sara to discuss his findings. Azhar and Sara were unaware that Melissa owned a new Mercedes or that she got a villa with a big in-ground swimming pool. Apparently, Melissa always drove an older Volkswagen to work, and she said very little about her private life. The discussion of discrepancies in the Venue's accounting records brought tears to Azhar's eyes. After recomposing himself, Azhar asked Kamal if Melissa was a thief. Kamal explained that the fraud examiner's code of ethics prohibited him from expressing an opinion on the guilt or innocence of a person, and only the courts can make that judgment. However, he is concerned about these discrepancies, and he believes that a deeper investigation is warranted. Azhar asked Kamal how to proceed, and Kamal said he would like to meet with Melissa alone to discuss the Venue's recordkeeping practices. Azhar suggested that he should be present when Kamal interviewed Melissa, but Kamal said this was a bad idea because he wanted to employ the "Reid Technique." Kamal explained that the Reid Technique was a scientific method for interviewing persons suspected of misconduct, and it maximized the likelihood of finding the truth in an interview setting. Kamal further explained that Azhar's presence at the interview could make the Reid Technique less effective, and Melissa would be less likely to admit wrongdoing if Azhar were there. Azhar agreed to allow Kamal to interview Melissa alone. Kamal indicated that Melissa should not be told about the impending interview. He explained that in this particular set of circumstances, i.e., very strong evidence of serious misconduct, a "surprise interview" would be most effective. However, Azhar felt it would be morally wrong to subject Melissa to this interrogation without giving her ample time to collect her thoughts and defense. Kamal was unsuccessful in persuading Azhar to agree to a surprise interview, so he agreed to interview Melissa the following Monday which would give her the weekend to prepare.

BURNING THE BOOKS

The next day, Azhar called Melissa to his office to explain the coming interview. He said that someone had complained about the recordkeeping methods used at the Venue, and the Family felt it was best to eliminate any charges of impropriety with an investigation. Azhar further explained that this investigation would preserve the image of the Family, and he should give her full cooperation. Melissa sat in stunned silence for an extended period, and then asked, "Who made the charge? Was it Sara?" Azhar assured her that it was not Sara, but he was unable to reveal the exact nature of the charge or the person who brought the complaint to his attention. Melissa said that she did not understand why the Family would authorize an investigation without any evidence. Melissa then asked, "Is there any evidence that I've done something wrong?" Azhar ignored her question.

Melissa maintained her composure until she found out that the Family had retained a professional examiner to conduct the investigation. She told Azhar that she would be happy to show him all of the Venue records right now, but she felt deeply hurt that the Family would bring in an "outsider" without first discussing these accusations with her. With considerable sarcasm, Melissa asked Azhar to name the person who would be conducting the "Inquisition." Azhar said it was a local accountant, and there would only be routine accounting questions. Melissa rolled her eyes and shook her head. Azhar looked directly at Melissa, and asked her if there was anything he should know about? Melissa instantly snapped, "Absolutely not! I have nothing to hide, and there is nothing wrong at the Venue." Azhar said this was good news, and therefore she had nothing to fear. Melissa stormed out of Azhar's office saying, "Fine, I'll be ready by Monday morning." Later, Azhar noticed a fire at the barbecue pit of the Royale Wedding Venue picnic grounds. Azhar settled down to work in his office, and a short time later, he received a phone call from Wan who was the head cook at the Venue. Wan apologized for bothering him, and he asked if Azhar knew that many Venue records were being burned by Melissa? Azhar asked, "What kind of records?" Wan said that he was not sure, but they appeared to be the Venue's accounting records. Azhar hurriedly walked across the street and into the Venue. Azhar asked, "Where is Melissa?" The janitor pointed to the back door which was adjacent to the picnic area. Azhar walked out into the picnic area, and he could see Melissa throwing documents into the fire. Melissa was unaware of Azhar's presence as he approached, and she was startled as he quietly stepped beside her. Azhar said, "What are you doing Melissa?" After catching her breath, Melissa said she was just cleaning her office in preparation for Monday. Azhar picked up several of the documents that were going to be thrown into the fire and noted that they were for a banquet given by the Venue just a few weeks ago. Azhar said, "These documents are from last month, why would you be burning them?" After a long moment of silence, Melissa said the single word "duplicates." Melissa further explained that her office was cluttered, and she was getting rid of duplicate records so that everything would be ready for Monday. Azhar commented that these documents appeared to be originals, and if these were duplicates, could he please see the originals. Melissa replied that Sara had the originals per his previous directive. Azhar looked squarely into Melissa's eyes and said that she needed to tell the truth. Melissa shouted, "That's it, I'm out of here! If my word means nothing to you, then I shouldn't be working here."

Azhar replied in a calm but firm voice, "I want your keys." Melissa handed Azhar her Venue keys, and she walked straight to her Volkswagen and drove away without looking back or taking anything with her. Azhar never spoke to Melissa again. When Azhar entered Melissa's office, it was cleaned out. All of her personal possessions were gone, and there were no records of any kind. Azhar called Sara to come in and assist him, and a careful search of the Venue revealed that the only surviving records were the small amount that Azhar prevented Melissa from burning in the grill.

CONCLUSION

After Melissa was fired, several employees of the Venue came forward and told of systematic pilfering of food and wine by Melissa. Boxes of steak, lobster, caviar and black cod fish, etc. were routinely taken by Melissa. Special discounts were given to Melissa's friends and relatives, and Melissa issued paychecks to her relatives even though they never worked at the Venue. Moreover, duplicate payments to certain vendors appeared so frequently that the possibility of human error must be excluded. The same vendors never received SST from the Venue, which enabled them the opportunity to avoid declaring Venue payments as income. Based on his copies of Venue records, Kamal estimated the Venue's total loss at between RM200,000 and RM300,000. Azhar accepted responsibility for the loss, and offered his resignation to the Family. The Family declined Azhar's resignation, and Azhar hired a replacement for Melissa. Profitability returned to the Venue, and there was even enough left over for significant charitable contributions. Sara worked with Azhar to develop proper internal controls for the Venue. Melissa filed for bankruptcy and moved out of Malaysia. She was never prosecuted because much of the evidence against her was burned, and the photocopies made by Azhar and Sara were legally suspect in court under the best evidence rule. In addition, Azhar believed that an open trial would have severely damaged the Family.

Required:

(a)The Fraud Triangle says that fraud occurs when there is psychological pressure, opportunity to commit the fraud, and Rationalization to justify the fraud in the perpetrator's mind. Discuss the elements of the Fraud Triangle that appear in this case.

(b) "Red flags" are clues that should have alerted overseers to the possibility of misconduct. Some red flags were available to Azhar, while other red flags could only have been recognized by a trained accountant. Discuss the red flags that should have told Azhar that something was wrong at the Venue and the red flags that Kamal would have noticed in his investigation.

(c)Discuss the mistakes that Azhar made in resolving the case.

(d) Given the facts in this case, speculate on how Melissa perpetrated the fraud.

(e)Discuss some internal controls that would have been beneficial for the Venue.