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ACC 5600 2016 Jenkins Manufacturing Company This following case was adapted from the Practical Problems section of the ACFE Conducting Internal Investigations Handbook. Fact set one, two, and three are provided below. Complete each fact set before beginning the next one (i.e. answer fact set one questions before looking at fact set two). Fact Set One You are K.C. Barton, a new auditor in the Internal Audit department of Jenkins Manufacturing Company. Jenkins Manufacturing Company (JMC) has been in business for more than fifty years in central Texas and is a publicly traded company with ten subsidiaries. The company manufactures parts for computers, having jumped into the computer business when it was in its infancy back in the 60s. The Jenkins family still owns the majority stock of the company. The company has 12,000 employees that are spread all over the United States, Canada, Mexico, and Scotland in seven offices. The business has been solid for most of its forty years, and although it has had slowdowns during recessions, there have been very few times when the company had to lay off employees. The company's chairman of the board is James Jenkins, son of founder John Jenkins. The Vice-Chairman of the Board is Jenny Jenkins Roberts, daughter of John Jenkins. Other senior executives are not members of the Jenkins family, but have been with the company, on average, 20 years. The company prefers to promote from within and offers stock options to all employees no matter what level they are. In order to become familiar with the audits that are conducted by the department, you have been reviewing working papers for previous audits. You note that two years ago, an audit was conducted of the purchasing function of a small division of the company in which the purchasing director, Thomas Brackens, was extremely uncooperative. While that might be a fairly common occurrence in audits, this audit was never completed. There is a notation in the file that the CEO of the company asked the department to conduct another audit of an area that had been having serious problems as soon as possible, which required all resources to be pulled to complete the CEO's request. The internal audit department had planned to finish the audit but never did. The auditors who worked on the purchasing audits have since left the company as has the internal audit manager. There were some notations that the auditors were having trouble locating some invoices and requisitions that had been selected for audit and that there were some purchases that looked like that they had been split. A previous audit of the area was conducted without any major findings noted. In fact, there is a memo in the file from Jim Miller, the former director of purchasing (now retired), who thanked the internal audit for their assistance and that he would implement their recommendations immediately. You decided that it is time to look back into this situation. There are too many red flags that say something isn't right. You bring it up to your manager who says to go ahead and check it out, but that if it's going to take more than 100 hours, you would need to let her know. QUESTIONS: 1. What are split purchases? 2. What red flags do you see that are troublesome? 3. How do you plan to begin the audit? 4. Based on the facts how do you think you should approach Mr. Brackens? Jenkins Manufacturing Company Fact Set Two Complete Fact Set One before reading this fact set. You decided to conduct an audit of the purchasing function for this division. But before you do, you decide to get some more information about the division and the employees. You find that Mr. Brackens has been an employee for more than twenty-five years, coming to the company right out of college. He has six employees that work for him, one is a manager (Angela Harkins) and the rest are buyers- two senior buyers and three junior buyers. Harkins has been an employee for 15 years and the buyers have been working in the department for six months to ten years: Jim Rydel, Sr. Buyer (10 years); Ruth Bell, Sr. Buyer (7 years); Ben Troupe, Jr. Buyer (2 years); Rhonda Davidson, Jr. Buyer (2 years); Rick Adams, Jr. Buyer (6 months). Regarding purchasing policies, any purchase that is more than $10,000 must go out for a bid. All bids must be approved by the manager of the purchasing department or higher. Only authorized vendors are allowed to bid. Vendors without a vendor number must be handled by special processing and approved by the director. Junior buyers can authorize purchases of up to $5,000; senior buyers, $7,000; managers and directors, $9,000. You pull a listing of vendors who have been paid more than $100,000 for the years, 2000, 2001, and 2002 and find the following. JMC Vendors with >$100,000 Black IPS Warehouse Eqpmt Lantern Co Oak Hill Distributors Seros Randazzo Supply Adam Systems AA Supply Ad Sys Top Q Blues Pro 2000 47,844 12.09% 30,402 7.68% 38,089 9.62% 61,166 15.46% 37,090 9.37% 41,189 10.41% 50,470, 12.75% 67,194 16.98% 20,321 5.13% 0 0.00% 0 0.00% 395,765 100.00% 52,468 44,447 78,682 24,566 48,843 62,012 52,198 80,378 78,019 105,620 260,785 890,019 2001 5.90% 4.99% 8.84% 2.76% 5.49% 6.97% 5.86% 9.03% 8.77% 11.87% 29.30% 100.00% 2002 0 0.00% 70,940 4.69% 45,872 3.04% 78,229 5.18% 119,068 7.88% 111,845 7.40% 140,033 9.27% 113,723 7.53% 173,854 11.51% 247,172 16.36% 408,323 27.02% 1,511,061 100.00% Total 100,312 145,789 162,643 163,961 205,001 215,046 242,701 261,295 272,194 352,792 669,108 2,790,842 % of Total 3.59% 5.22% 5.83% 5.87% 7.35% 7.71% 8.70% 9.36% 9.75% 12.64% 23.98% 100.00% QUESTIONS: 1. Discuss anything you find odd or suspicious based on the summary table above. 2. What is a predication for fraud? 3. Does sufficient documentation and information exists to establish a predication for fraud in the case at hand? 4. Based on facts and data available at this point what would be your next step(s)? Jenkins Manufacturing Company Fact Set Three Complete Fact Set Two before reading this fact set. You contact Mr. Brackens and inform him that you will be conducting an audit of his area and it will begin tomorrow. You will be conducting and audit of the area to close out the audit that was started a few years ago. You don't expect to be in the area more than a few days at most, but would appreciate his and his staff's full cooperation. Mr. Brackens informs you that he and his staff do not have time for you to come in until, at the minimum, 3 months from now. Needless to say, after going back and forth between him and your boss, you make plans to conduct that audit tomorrow. You pull a listing of invoices paid to the highest paid vendors (See Jenkins support material PDF file pages 111). You pull the vendor agreements for the vendor's selected (See Jenkins support material PDF file pages 12-21). Some of the vendors have long standing relationships with JMC while others are fairly new. You also pull a sample of the requisitions and can find all of them except for the ones for Lantern Co. You then go the accounts payable and match the requisitions that you found in purchasing with the invoices that have been paid for each vendor. The invoices you have pulled contain the required paperwork and have the proper authorizations, even for Lantern. While in accounts payable you start talking with one of accounting clerks, Beth Ann, who tells you that Mr. Brackens is a very demanding manager and is very big on providing prompt payment to the vendors. In fact, for one vendor whom he says is very picky, he has to pick up their checks and personally deliver them. Beth Ann recalls that the account is Lantern Co. For a couple other accounts, he wants to know every month when their checks go out. He says he has to monitor them since they are fairly new. He used to do that for some other accounts, but not any more. Although she couldn't remember the ones that he doesn't ask for any more, he does keep an eye on Top Q and Blues Pro. Beth says, \"This is probably a good thing, since we pay them more than others\". You pull the checks and they have all been deposited into the vendor's checking accounts. QUESTIONS: 1. After reviewing the detailed invoice listings (see Jenkins Support Material PDF file pages 1-11) and the vendor agreements (Jenkins Support Material PDF file pages 12-21; labeled pages A-J)) discuss any suspicions you may have. Do you think there may be a fraud, if so what fraud schemes could be occurring? 2. List some specific concerns you have related to: a. the detailed invoice listings b. the vendor agreements 3. Have your audit plans changed or expanded since the initial planning - if so explain how and why