Question

You have recently been introduced to Laura Spencer, who is the Chief Financial Officer (CFO) of a services firm that specialises in providing on-site technical assistance for computers and networks. Laura knows that you have recently obtained employment as a graduate forensic accountant and arranges to meet you over coffee. Laura brings copies of the company’s cash-flow statements to this meeting; after reviewing the financials, you note that cash flows have been decreasing for the last three years. When you query Laura as to reasons for the continual decrease in cash flows, she responds by saying “I just don’t understand why this is occurring; even though we seem to have more customers year-on-year, the cash doesn’t appear in our financials”. On hearing this, you inform Laura that you believe fraud may be occurring in her company. You suggest that cash collections should be the initial starting point for any investigation.

Required:

Explain how you would approach the investigation of the situation in Laura’s firm, and outline the investigation technique (or techniques) that would be best for finding the potential fraud in this case. (6 marks)

Answer 1

The issue here is decreasing cash flows even though there has been an increase in the customer base.

Firstly collect all the details which involve cash flow like account receivables, average collection period, account receivables to sales ratio. To properly manage your business's income , first analyze the components that affect the timing of your cash inflows and cash outflows. An honest analysis of those components will help in finding problem areas that cause income gaps.

1. Account receivables- Accounts receivable represent sales that haven't yet been collected.  For managing cash flows, you want to know the negative income effects caused by the time it takes your customers to pay on their accounts.

2. Credit terms- Credit term is the deadline set for customers to pay. This affects cash inflows. Thus it should be studied well. Also, I would suggest Laura to offer trade discounts in order to encourage immediate payment.

3. Credit Policy - Next step is I would check the credit policy of the firm, to ensure whether the credit policy is appropriate and not too strict or lenient.

4. Accounts payable and cash flows- Accounts payable refers to payments yet to be made in the near future, meaning 30 to 90 days. This is going to increase cash outflows so do keep it in mind.

All these aspects should be thoroughly gone through. Also, the firm should check whether there is no embezzlement and misappropriation of cash at any stage.