Question

Fraud at Berry, CPA’s

BERRY, CERTIFIED PUBLIC ACCOUNTANTS

Brief History of the Firm

In 1999, John Berry graduated from college with an accounting degree. After 10 years at an international accounting firm, John decided to start his firm, Berry, CPA’s. The firm, located in Oakwood, caters to local clients; specifically, John and his staff of four professionals specialize in non-public companies. The majority of the services provided by Berry, CPA’s are tax planning and preparation; however, the firm also performs bookkeeping services, audits (mainly for client debt compliance purposes), and other attestation services. Berry, CPA’s has been a profitable and successful business for John. Tax returns are rarely questioned by the IRS, and banks and other lenders trust the attestation services provided by Berry, CPA’s. Clients have come to expect quality work from Berry, CPA’s, and they receive this quality.

Two Clients of Berry, CPA’s

Anderson Automotive

Anderson Automotive is the most profitable car dealership in Oakwood. The company, which sells approximately 100 new cars each month, has been a business leader in the city for 30 years. Anderson sells about 20 percent more used cars than new ones each month. In addition to the margins made on car sales, Anderson Automotive earns additional revenues through its finance and service departments. These revenues for service and parts average $200,000 each month. The dealership has a strong financial history and expects moderate growth in the future.

Allen Anderson leads this family-run automotive dealership. Outgoing and personable, he brings strong sales and customer service to this business, which he took over when his father retired ten years ago. Anderson's family members are responsible for all aspects of the business except for the accounting department. Allen knew accounting was difficult and wanted a CPA firm to perform bookkeeping services and tax preparation. Berry, CPA’s has been Anderson Automotive’s accountant for ten years. Allen has been very pleased with the firm’s work. He was especially impressed with Kate Conrad, a Berry, CPA’s employee in charge of the bookkeeping services provided to Anderson over the past two years. He trusted her completely and, although he did not understand accounting, felt she did an excellent job.

Silverset Jewelers

Silverset Jewelers is another important client of Berry, CPA’s. Founded and operated by renowned artist and silversmith James Cannon, Silverset sells Cannon’s unique and highly demanded creations. As Cannon’s reputation grew, he knew he needed a good partner to run the business side of the company. Therefore, he enlisted an M.B.A. to manage the production and finance departments, so he could concentrate on Silverset’s creative development. Based on his education and experience with manufacturing companies, the new partner quickly identified the need for internal controls at Silverset. Since the raw materials and finished goods inventory consisted of small but valuable pieces, he implemented several physical controls such as locks on the cases and security cameras. He also added 2 other extensive controls, including policy and procedures manuals and training for the employees, formal accounting and finance documents, and extensive computer systems with limited access. Although a total separation of duties is not present at Silverset due to its small staff, both Cannon and his partner actively monitor the company’s daily activities. Each year, Berry, CPA reviews Silverset’s annual and quarterly results and prepares its taxes. The Berry, CPA’s employees assigned to Silverset consider it an easy engagement because Silverset presents impeccable, nearly error-free records.

MONICA SNEAD

Monica’s Employment and Education History

After working as a retail sales associate for ten years, Monica Snead returned to college to complete her accounting degree. She put in many hours at her sales job but had not received the compensation or respect she believed she deserved. She rarely missed work, was punctual, and often exceeded her sales quota; however, she was never promoted or given a substantial raise. Therefore, Monica decided a college degree was the key to her financial success.

Monica worked hard in college while continuing her sales job, looking after her two children, and supporting her husband who was injured at his job. Monica was determined to make life better for herself and her family. During college, she was willing to ‘‘get the job done’’ in her courses. Faculty members knew that Monica was bright, but her performance was often marginal. She often skipped class, but when she was there, she was an active participant in discussions and seemed to grasp concepts well. She often missed daily assignments, but she would compensate by earning higher scores on exams. Group assignments were particularly difficult for Monica because they forced her to arrange meeting times outside of class. Luckily for Monica, her classmates always covered her responsibilities when she could not do the work. Most of them understood she could not work and complete all her homework assignments while watching her kids. They also enjoyed the baked goods she brought to meetings. Every once in a while, some fellow students would give her a poor peer evaluation because she did not complete her portion of the assignment; however, the good grades on the assignments outweighed the evaluations. She felt that most college students could not comprehend her position because they did not have the same ‘‘real-life’’ responsibilities.

Monica completed her degree with 150 hours and a 3.00 GPA. She was thrilled; her family was very proud. Monica’s father-in-law, a prominent attorney, was especially over-joyed. Despite his help, Monica and his son had struggled with their finances. He was so proud they had started taking responsibility for themselves. After graduation, Monica began her job search immediately. She had many bills to pay, including payments on a new convertible, a present she gave herself after graduation. She was glad to quit her sales position and hoped she would receive the respect she felt she rightfully deserved as an accountant.

Monica Joins Berry, CPA’s

Busy season was about to begin, and one of Berry, CPA’s best employees, Kate Conrad, gave her two-week notice. Kate was a smart, successful CPA who enjoyed the challenge and the camaraderie of working in an office. Although she did not need to work due to a large inheritance, Kate often worked 50-plus hours a week during her five years with the firm. John Berry was sad to see such a valuable employee leave the firm.

Monica’s resume could not have come to John Berry at a better time. Although Monica’s grades were not outstanding, John was impressed that Monica did have a 3.00 GPA while working full-time and maintaining a family. Monica appeared able to multi-task, a skill 3demanded of John’s staff. John was also pleased that Monica came from a distinguished family in Oakwood; he didn’t feel the need to check her references, because the Snead family was well known and respected. Therefore, he hired Monica immediately.

When Monica started working, she was immediately assigned to Anderson Automotive to take Kate Conrad’s place. This client was small and required only one staff accountant. John Berry not only introduced Monica to Allen Anderson and the other Anderson Automotive employees but also spent the first day with Monica on the job. Previously, he had spent three days training Kate at Anderson Automotive, but since it was busy season, he had to focus his attention on tax returns. He was thankful that Monica was a fast learner. Monica could not believe all of the information needed just to perform bookkeeping services. Although she felt she learned a lot in her accounting courses, they were nothing like actual on-the-job experience. While Allen Anderson did not expect a new graduate to take over Kate’s job, he trusted John’s judgment. After all, Monica had worked hard for years before obtaining her degree, appeared eager to learn, and was eager to pass the CPA examination.

Monica’s Performance at Berry, CPA’s

Monica worked for three years for Berry, CPA’s with Anderson Automotive as one of her main responsibilities. She performed bookkeeping services for Anderson, visiting the automotive dealership once a week. She was fortunate that a lot of the work could be done from Berry, CPA’s office. After the initial learning curve, Monica excelled in the eyes of Allen Anderson. She always got her job done on time and in spotless order. Her weekly job responsibilities included recording journal entries, preparing checks for bills to be paid by Mr. Anderson, and making trips to the bank and post office. Monthly, Monica prepared bank reconciliations and compiled financial statements for review by Mr. Anderson. After approval, Monica forwarded the financial statements to the bank, which were a requirement to keep Anderson Automotive’s line of credit open. Within a few months, Allen Anderson completely trusted Monica, just as he had trusted Kate. He didn’t need to review the financial statements, journal entries, or the supporting documents for payments. He did not understand accounting, and he believed in Monica. He was about to approach Monica about working for Anderson Automotive full-time. She seemed to be a part of the Anderson family and dedicated to the job. When Anderson employees put in extra hours, Monica followed suit. Even during her vacations, Monica took time to help at the dealership. John Berry was pleased with the high praise from Allen. He was relieved that he did not have to frequently review her work. Since the client was happy, he worked on other projects and stayed out of Monica’s sway.

Monica was also assigned to Silverset Jewelers. This client required the work of two staff accountants and a senior. At first, Monica was glad to have colleagues available to answer questions, share the work, and help her get started. She learned a lot from the senior accountant during the first year, although it was odd to be supervised by someone younger than she was. Monica was impressed with the internal controls at Silverset and often commented on the impressive hands-on management style in every aspect of the business. Monica liked working at Silverset but often suggested to her colleagues there that it was Anderson where she was the most needed. To the detriment of her Silverset audit team, Monica often delayed working on the engagement whenever Anderson Automotive needed her. She was the only staff accountant on the Anderson job; it was her top priority.

After three years, John Berry began to receive mixed reviews from clients for Monica Snead. He was content with her praise from Anderson Automotive, but other clients, including Silverset Jewelers, were less impressed. Monica seemed to perform at or below expectations for a third-year staff on her other jobs. Her intelligence and confidence were evident, but her work and effort did not convey her abilities. Also, she often complained that her friends at large international accounting firms were making quite a bit more money than she was. On the positive side, Monica recently passed the CPA examination. She was professional at work and in the community; her expansive wardrobe always reflected the role of a professional, and her demeanor was a positive reflection on Berry, CPA’s. Monica also was making some new business contacts for Berry, CPA’s through her membership at the country club and the gated neighborhood where she lived. She had brought in two new clients for the firm, a feat that was unheard of for a staff accountant. Monica was well-liked by her coworkers at Berry, CPA’s. She often had them over to her new home to socialize after working hours. They enjoyed her company and were impressed that she was juggling her career and family. Since her husband was still collecting disability, they assumed Monica’s father-in-law was footing the bill for some of their luxuries.

Unfortunately, Monica had a car wreck during the busy season of her fourth year. Although she did not have any permanent injuries, Monica had to stay in the hospital for three weeks. During that time, John Berry covered her work responsibilities. During the second week of Monica’s absence, John collected Anderson’s mail from the post office and began preparing checks for payment. John was surprised to see a very large credit card bill. Upon examination of the bill, John noticed large charges at a home improvement store. Was Anderson Automotive expanding its business? John was curious, and when he brought flowers to the hospital for Monica, he asked her about the charges. Monica could not answer John’s questions and seemed rattled by the discussion. John contacted the credit card company to determine if the charges were valid. He discovered that the charges were authorized by Monica Snead. Further investigation revealed that the charges were for personal items for Monica. In response to these charges, John meticulously examined the dealership’s accounting records and found that Monica had been making personal charges and cash withdrawals on Anderson’s credit card for two and a half years. John also investigated her work with her other clients. He was relieved that he did not find any additional irregularities; nevertheless, he was overwhelmed and distraught over Monica’s actions at Anderson Automotive.

Requirements

1. Monica Snead committed a fraudulent act by making personal charges and cash withdrawals on Anderson Automotive’s credit card. The accounting profession believes there are three conditions necessary for fraudulent behavior.

a. List the three elements and discuss how each of these elements is present in MonicaSnead’ fraud at Anderson Automotive. (Provide examples from the case)

b. Discuss why did John not discover fraudulent behavior from Monica at other clients, specifically, Silverset Jewelry?

c. Discuss why other Berry, CPA’s accountants, specifically Kate Conrad, did not perpetrate fraud at Anderson before Monica’s hiring?

d. It has been suggested that there may be a fourth element of fraud (see Wolfe and Hermanson 2004). Discuss whether this fourth element is present in Monica Snead’sfraud at Anderson Automotive.

2. Accountants have the responsibility to perform quality services with integrity, objectivity, and professionalism. Accounting firms have the responsibility to hire and monitor competent personnel, so they can fulfill their assigned responsibilities.

a. Discuss the mistakes Berry, CPA’s made in hiring Monica and supervising her at Anderson Automotive?

b. Discuss the steps you think John Berry should take to rectify the situation with Anderson Automotive?

3. In the case, it was noted that Monica’s work as a student was ‘‘marginal.’’ Her classmates often covered her responsibilities in groups when she could not complete her share of the work.

a. Do you think Monica’s habits and attitudes in college and her sales job contributed to an undesirable work pattern at Berry, CPA’s? Why or why not?

b. If you were in a group with Monica in college and she was not participating, what would be the best way to deal with the situation? (do not say“tell the professor”)

Answer 1

1. (a) The three conditions for fraudulent behavior are

1. Opportunity: It refers to circumstances that allows a misrepresentation to occur. In the present case, Monica was the only accountant at Anderson Automotive without supervision at all. The situation gave impression to Monica that her work will not be cross checked and she can do what ever she wishes to do.
2. Attitude: It refers to a frame of mind that justifies misrepresentation. Monica was convinced that she was getting less than what she deserved. It is quiet evident from her previous sales job and her conversation with John Berry "she often complained that her friends at large international accounting firms were making quite a bit more money than she was". She have an attitude with urge to earn more.
3. Pressure: She was the sole earning member in her family. Monica has to look after her two children, and support her husband who was injured at his job. Monica and her husband had struggled with their finances despite of help received from Monica’s father-in-law. These situations built pressure on Monica to become self sufficient to meet the requirements of her family.

1. (b) John did not discover fraudulent behavior from Monica at other clients, specifically, Silverset Jewelry because at Silverset, she was accompanies by a colleague and moreover the internal controls at Silverset were monitored by the partners themselves and were very effective. Hence there were negligible chances for committing a fraud by Monica due to strong internal controls by partners and cross checking of her work by her colleague.

1. (c) Other Berry, CPA’s accountants, specifically Kate Conrad, did not perpetrate fraud at Anderson before Monica’s hiring because the fraud was committed by none other than Monica.

1. (d) Capability is the fourth element of fraud. The fourth element was also present in Monica Snead’s fraud at Anderson Automotive. Within a few months, Allen Anderson completely trusted Monica, just as he had trusted Kate. Monica seemed to be a part of the Anderson family and dedicated to the job. When Berry identified the huge credit bill, he discovered that the charges were authorized by Monica Snead, that means Monica was the authorized representative of Anderson Automotive. All the above mentioned factors describes the capability of Monica to commit fraud.

2. (a) The major mistake committed by Berry, CPA's in hiring Monica was not checking her references, because the Snead family was well known and respected. Checking references only speaks about the character and attitude of the prospective employee just like the resume speaks about the qualification and work experience.

Due to busy season at work, John Berry only spent first day of work with Monica at Anderson Automotive and after that left the work responsibility at Monica. John Berry never thought of Cross checking her work with Anderson Automotive as he trusted Monica's character and the client was also satisfied with her work. Monica managed to earn trust at Anderson Automotive and their reviews lead to winning the trust of John Berry.

2. (b) Being one of the important clients of Berry, CPA's, Their trust with John Berry is the most important factor. In order to rectify the situation, John Berry should have a word with the Anderson and explain the situation regarding fraud by Monica and compensate for the damages caused to Anderson Automotive caused by Monica because the contract for maintaining accounting information was assigned to Berry, CPA's.

3. (a) In my opinion, Monica’s habits and attitudes in college and her sales job contributed to an undesirable work pattern at Berry, CPA’s. Monica always felt that she had not received the compensation or respect she deserved. she was never promoted or given a substantial raise for her outstanding performance. This built the urge of earning more in Monica. Monica also complained for low incentives compared to industry at Berry, CPA's. This must have contributed to undesirable work pattern at Berry.

3. (b) According to me, the best way to deal with the situation with Monica was instead of enjoying the baked goods Monica bought to the meetings, asking her to devote the same time with the group fulfilling her responsibilities with the group assignments. If Monica still failed to honor her part of responsibility, I would have convinced other peers to give her poor peer evaluation so that the fact she was not good at group assignments can be clearly stated in her reports and can not be compensated by her outstanding grades.