Question

Problem Mikos Frederick, an immigrant from Ukraine, is a hotel owner in Las Vegas. Since his arrival in America during the 1960s, Frederick has built a very successful and popular hotel. Until recently, the hotel averaged $20 million in total revenue per year. Lately though, there have been rumors that Frederick’s hotel, the Russian Roulette, may be suffering unusual losses. Recently, several of Frederick’s key staff have quit, complaining about low wages and nonexistent benefits. In fact, the hotel’s main attraction, its popular restaurant chef Alec Klarinko, quit as well as the hotel’s headlining performer. While Frederick focused on coming up with a new compensation policy, he hired CPA Tony Slinko to look into the hotel’s diminishing cash flows. The first thing Tony did was head for the kitchen to partake of the award-winning food. The new chef, Jim Smoot, wasn’t what Tony expected. First of all, he wasn’t Russian, as most of the employees seemed to be, and second he refused to talk about why he had come to the Russian Roulette when so many wanted to leave. After his visit to the kitchen, Tony began sifting through the accounting documentation looking for possible fraud symptoms. Tony reasoned that if employees felt like they weren’t being compensated accordingly, they may be apt to defraud the hotel.

Questions

1. Could Tony be right? Are employees defrauding the company, or has the Russian Roulette finally bit the bullet?

2. What possible fraud activities are associated with declining cash flows?

Answer 1

Answer:

1)

Right now don't think the workers are defrauding the organization. I think the proprietor, Mikos Frederick, has set his organization up for failure since he has disregarded or ignored his worker's needs. The workers were worn out on low wages and non-existent wages which made them quit. Rather than the representatives trying to get their cash from the organization however taking or tricking the financial document, they simply quit their occupations and left the organization. Mr Frederick ought to have seen that his representatives or employees were miserable and taken care of business. With him losing the entirety of his best workers, his business in turn lost its income since his best cook or best chef was gone and clients were not content with the service any longer.

2)

Regardless of whether accounting makes your head turn, there is one extremely straightforward thing you can do:Over time, increases in an organization's income from activities ought to generally follow increases in net gain. On the off chance that you see cash from operations decrease even as overall gain continues walking upward - or if money from activities expands significantly more gradually than net income. This generally implies the organization is generating sales without essentially collecting the money, and that is an excellent formula for an explode not far off. There are three primary things to look out for in detecting cash flow manipulation. The first is costs that are in effect improperly capitalized, thus are excluded as expenses yet rather show up as capital costs on the cash flow statement, making an asset which is amortized later on. An investor effectively rectify this by calculating free cash flow.

The second is tax. Tax paid on sales of investments will for the most part be remembered for operating cash flow yet it ought not as it's a non-recurring cash expense. Additionally, organizations can get tax relief from an complicated standard concerning share options. This is additionally remembered for operating cash flow however ought to be removed to get a genuine feeling of the acquiring intensity or earning power of the organization. The third is investments held 'for trading'. The buy and sale of investments held for exchanging is included in operating cash flow and under normal computations of free cash flow will be included in this too.