Peter Lawrence is the owner of Lawrence Hardware and Electric, a family owned business located southern New Jersey, just outside of Philadelphia. His business consists of over-the-counter retail sales and discounted sales of building materials to local contractors. Sales to contractors consist mostly of specialized lumber and electrical supplies that are not available through the areas larger suppliers of building materials and electrical parts. Most contractor customers have established accounts and place orders over the phone or the Web. However, contractors also visit the store to make purchases, sometimes purchasing on account and other times paying in cash. Retail customers pay only in cash.

Next to the front door is a long glass counter area with items that are sold from both inside the counter and the wall behind it. Two cash registers sit on the counter, and at least one of the two is open and in operation at all times during business hours. Lawrences bookkeeper is Mark Hansen, who works alone and maintains all accounting records, including accounts receivables and accounts payable. He also manages the checkbook, payroll, cash deposits to the bank, and all tax-related matters. He maintains all accounting records in Intuit QuickBooks.

Peter was happy he had hired Mark the year before, because before Mark, he had had a string of successive bookkeepers who each worked for a few months and then quit. In recent months, Mark has become moody and difficult to work with. Whenever Peter asks him a question about something, Mark becomes irritated.I know how to do my j ob, Mark tends to say. Peter has just shrugged off Marks irritable disposition, mainly out of fear of losing one more accountant.

Jill Evans works the front cash register most of the time. She is a long-time trusted employee who knows the store and the business inside and out. At the end of each day, she makes sure that cash drawers reconciled with the internal totals inside the cash registers. She then bundles up the days cash and checks for each register, seals them in envelopes, writes the totals on the outside of each envelope, and forwarded the envelopes to Mark for recording and deposit.

Sometimes contractors with accounts stop in the store to make payments on their accounts. Most of the time Jill is there to accept their payments and give them handwritten receipts from a receipt book; always leaving a carbon copy behind. If Jill isnt there, however, anyone else could accept contractors checks or cash and write them a receipt from the receipts book. Mark periodically picks up the receipts book for review, as well as cash and checks collected from customers. He usually keeps the receipts book for only a few minutes.

Right outside Marks office is a large bull pen where three commissioned salespersons worked. They bid on large jobs, signed contracts, and collected deposit checks and sometimes payments on account. They forward collected funds to Mark for deposit. They kept permanent copies of the contracts in their desk drawers.

Peter doesnt place a lot of faith in income statements and balance sheets. He mainly keeps his eyes on the monthly sales figures, which are the figures that made him start to worry. Marks most recent monthly report showed that sales were off by about $100,000. He knew this couldnt be right because sales had been better than ever. You must have made a mistake with the sales number, he said to Mark. I know when things are better and when things are worse.Peter expected Mark to get irritated as he usually does, but to his surprise, Mark merely said, Perhaps so; let me check it and get back to you tomorrow.The next day Mark appeared with a new version of the report. This time the month-to-month sales had increased by about $50,000.Trying to keep Mark from becoming irritated, Peter smiled and said, Seems more reasonable. What was the problem?Mark just shrugged his shoulders, Peter nodded, and the meeting ended.

When Peter got back to his office, he received a call from the phone company saying that the phone bill hadnt been paid and was about to be cut off. It seemed that Mark was really screwing up. First there was the error in the sales numbers and now an unpaid phone bill. Peter usually didnt pay much attention to the bank and routine bills, but in this case, he decided to login to his online banking service to see whether the check for the phone bill had been paid. After Peter logged into to the online banking system, he was surprised that the balance in the operations account was only $48,245.12. This was much below Lawrences normal target balance of $100,000. He was really beginning to worry.

That night he went to the office alone and studied Marks financial reports for the previous three months. What he found wasnt good: The numbers showed that sales had been steadily declining for the previous three consecutive months. He then glanced at his phone and noticed that he had one voicemail message waiting. Someone must have called him after he had left for a late lunch at 4:30 pm. The callers message follows:Hello, this is William Stanford from the New Jersey Department of Revenue. I need to meet with you privately as soon as possible to clear up an issue relating to your payroll taxes.The caller then left his phone number with a request for a call back between 9:00 am and 5:00 pm. Peter recognized it as a landline number in Trenton, the state capital. Hes probably not a field agent, he thought, or he wouldnt have requested a call back to his office. Peter then shifted his attention back to Mark.

In the morning, Peter called Mark into the conference room next to Marks office. Peter brought Jill, his front cashier and most trusted employee, with him for moral support. The three sat at the conference table, and without a word, Peter placed copies of the financial reports for the previous three months on the center of the table. Whats going on around here? Peter asked Mark in a tone of voice that failed to hide his anger.Things dont seem right.Are you accusing me of something? asked Mark. Peter thought for a moment, and then replied: Yes, actually, I am. The bank account is short, your sales reports are making no sense, you didnt pay the phone bill, and now Ive had a call from the Department of Revenue.Marks face turned red. There was no stopping his irritability from erupting into anger. Ive had enough of you and this place, he yelled. I quit.The conversation ended with Mark jumping up and storming out the door. Peter was now very stressed, as the day was the 18th of the month and without an accountant, he had no way to send out monthly statements when the end of the month rolled around.

Peter immediately asked Jill to box up everything in Marks desk and told her, Dont let him back in here again if Im not around. Make him wait up front in the store. Peter then changed the alarm code and called the alarm company and changed the password. He told the company that Mark was no longer authorized to access the building. The next day, Peter moved Marks computer to his own office. He had tossed and turned all night long, unable to sleep, trying to put all the pieces together. He had come to the conclusion that everything pointed to Marks embezzling funds.

In reviewing Marks computer, Peter came across a document file named complaint.docx in the electronic recycle bin. Inside was a letter addressed to the Department of Revenue with a carbon copy indicated for the Internal Revenue Service. The letter read as follows: To Whom It May Concern: I work for Peter Lawrence, the owner of Lawrence Hardware and Electrical. The business is located at 125 Union Street, Cherry Hill, NJ, phone number 609-555-5555. Im writing to inform you that Peter Lawrence is systematically stealing payroll taxes. Instead of remitting the funds as hes required to do, hes sending you false reports and instead using the money to pay his personal monthly bills, and I strongly suspect that hes been skimming some of the cash receipts in anticipation of the business shutting down. Hes months behind in paying many of his bills and creditors and is on the verge of financial collapse. Im sure that in the end you will end up being cheated out of a lot of taxes. Another thing that Lawrence has been doing is overbilling the local government on its orders with the store. This guy is a real crook. He would sell his own grandmother for a hundred dollars. I suggest that you investigate quickly, because hes been doing this for a long time, and very soon it will be too late for you to recover anything. I would appreciate very much if you keep this tip in confidence. Lawrence is a ruthless man, and he still owes me back pay. Sincerely, Mark Hansen.

After Peter read the letter, it began to dawn on him that things were much worse than he had imagined. An hour later, two people in suits, Stephen Hammer and Janice Boracho, showed up at the front counter. They flashed badges, identified themselves as agents from the Department of Revenue, and told him they wanted to ask some questions.Ill be happy to meet with you, but not here, said Peter. Lets do this in my attorneys office.Stephen Hammer did all the talking: If you dont cooperate, well seek an immediate order to freeze all of your assets and bank accounts. We need answers to our questions right now, no waiting. You dont have to talk to us, but youll have to suffer the consequences if you dont.Peter answered their questions and explained to them that Lawrences payroll taxes were not segregated in a separate account, the story about his accountant quitting, and that all of his bank accounts were in the local area. Then they gave him a long list of documents that they wanted him to produce within seven days: financial statements, bank statements, and detailed payroll records. Stephen and Janice seemed completely uninterested in hearing about Mark and Peters suspicion that the man could have embezzled the payroll tax money. Thats your problem, is all that Stephen would say.

Two days after the interview, things got worse. When Peter arrived at the office at the start of the day, there was a letter from the bank on his desk: the companys unsecure line of credit had been frozen. When he called his usual contact at the bank, he was told that this had happened because the IRS has filed liens against your personal and business properties.Peter called his outside CPA, who quickly confirmed that the lien had been filed for back payroll taxes. You should have received a notice, said the CPA. This was the first that Peter had heard about any problem with the IRS. He met with his attorney, who advised him to hire an independent forensic accountant to investigate the companys financial situation and he possible embezzlement by Mark.

Required:

1. As the Forensic Accountant hired by Peter Lawrence, identify the issues that are relevant to the situation with the IRS, and what arguments you might make on his behalf to resolve the matter.