Table 2 – Elements of Fraud Plus Inquiry Method

Theft Investigative Methods

1. Surveillance and covert operations

2. Invigilation

3. Seizing and searching computers

4. Physical evidence

Concealment Investigative Methods

1. Documentation evidence

2. Audits

3. Electronic searches

4. Physical asset counts

Conversion Investigative Methods

1. Searching public records

2. Online resources

3. The net worth method

Plus Inquiry Investigative Methods

1. Interviews and interrogation

2. Honesty testing

(Adapted from Albrecht et al. 2012, 211)

Howie’s Café Caper:

A case study in employee embezzlement and forensic accounting

Shondra Johnson

Bradley University

Gail Petravick

Bradley University

Simon Petravick

Bradley University

ABSTRACT

This case is based on the actual prosecution and conviction of an employee for embezzlement. She was sentenced to four years of imprisonment, and her conviction was upheld on appeal. Students are given background information about the embezzlement and 14 findings of fact, which were taken from the actual court case. They use this information to examine how the Defendant committed the crime applying forensic accounting techniques, while developing analytical skills of nonfinancial factors. Upon completion of this case, students will have evaluated the way in which internal controls are applied in a retail establishment using the COSO framework as a guide for their analysis. Ultimately, students gain the understanding of how the lack of controls could allow the opportunity to perpetrate fraud. Furthermore, students prepare a net worth analysis to show the existence of income from unknown sources before showing how the Defendant had intent to commit the fraud. Students conclude the case by converting their forensic accounting analysis into a detailed explanation of how the facts support the required legal elements of embezzlement.

Keywords: COSO, Embezzlement, Forensic accounting, Fraud investigation, Net worth analysis, Skimming

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BACKGROUND FACTS

Becky McGill worked as the assistant manager of Howie’s Cafe in Fort Lauderdale, Florida. The Café has a general manager and 16 part-time employees. Howie’s Café provides breakfast and lunch Monday through Friday. Lunch generates the majority of sales, and most sales are a result of walk in customers. While patrons typically walk in, some catering business exists. Becky has served as assistant manager at Howie’s Cafe for Mr. Howard, the owner and founder of the cafe, for more than eight years. Her total employment at Howie’s spans nearly 18 years.

Becky has two teenage children. The oldest one plans to attend college in the near future. Also, Becky’s husband recently lost his manufacturing job due to outsourcing. When Becky became the assistant manager, Mr. Howard placed his trust in her by giving her keys, which allowed her to come in early or stay late. Becky was responsible for all operations. The following explains her duties specifically related to sales:

· Preparing the cash bank for the cash register

· Closing out the register, counting cash receipts, and preparing the daily cash report

· Correcting errors and making adjustments

· Making the bank deposits, receiving the bank statement, and reconciling the bank account

· Preparing employee time cards

In June, Year 1, Mr. Howard was diagnosed with cancer. His condition weakened in Year 2 and he was unable to go to the cafe every day. Because Mr. Howard trusted Becky so much, he looked to her to oversee much of the day to day tasks at the cafe and to fax him the daily cash sales reports. Mr. Howard did not receive any other income, expense, or financial statements.

The sales report was based on information pulled from a Z tape, a paper report printed by a cash register. See Figure 1 (Appendix) for an example of a Z tape.

The kind of register operated by Howie’s Cafe allowed the printing of a Z tape only when the manager or assistant manager used a special key. Typically, a business will attach a Z tape to the daily cash report as support for amounts collected. The Z total, or accumulated total amount of sales for the register, is printed at the bottom of the Z tape. The Z total may only be reset to zero by the manufacturer of the register. The Z tape also provides a subtotal of daily sales by category and by payment method.

Shortly after Mr. Howard’s illness worsened in Year 2, the County began a major highway construction project on the road in front of the cafe. Customers could always access the cafe despite the construction. The ongoing road construction, however, made it very difficult for some customers to drive to the cafe.

In September of Year 3, Mr. Howard passed away. Mr. Howard’s daughter, Sue, a food and beverage manager for a hotel in Florida, inherited the cafe. It took Sue six weeks after her father’s death before she could focus on the needs of the cafe. Her first task was to review the financial records, so she asked Becky to mail her the daily cash reports, bank deposits slips and bank statements for the previous six months. Sue quickly realized that for the better part of Year 3 the cafe was operating at a loss. Sue questioned Becky about the large losses, and Becky replied that business was down significantly due to the road construction. Sue knew this did not sound right because most of the customers actually walked to the cafe from the neighboring office buildings.

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Sue began reviewing the cafe’s bank account information for Year 3 and noticed that the bank deposits for the last few months did not include the expected level of cash.

Sue hired a new general manager and told Becky that she would be reassigned to work as part of the serving staff. This means that Becky would not be an assistant manager and would no longer have responsibility for any of the operations. Becky could continue working as a cashier on an as-needed basis.

Sue called her father’s accountant to discuss these findings and he told her to call the Economics Crime Division of the Sheriff’s Office and together they would conduct an investigation. The detectives in the Economics Crime Division issued a subpoena for Becky McGill’s personal bank account records, credit card records and other records. Together they summarized the information which would allow for the preparation of a net worth analysis. This information is shown in detail in Table 1 (Appendix).

The accountant’s analysis revealed that over a nine month period in Year 3 Becky made 107 cash deposits with many of the deposits being in the range of $9,750.00 to $9,999.00. When Becky was questioned why she had so many large cash deposits, she said that she was a part-time professional gambler and played the slot machines at the casino every weekend. Becky told the accountant that she had big wins in early Year 3, including a $20,000 video poker payoff, and that she gambled on her winnings and earned income thereafter.

ACCOUNTANT’S FINDINGS OF FACT

Sue and her accountant met with the detectives and presented their findings which are stated below and are collectively known as the Accountant’s Finding of Facts.

Facts determined by the Accountant

1. Accountant stated that Defendant’s daily cash sales reports consistently matched to the penny the amount of cash she deposited, a rare occurrence in retail cash sales.

2. The accountant stated that two “Z” tapes were run on the cash register and that one Z tape was always missing and not turned in with the daily cash report. The business only used one cash register

3. The accountant also stated that the Z tapes submitted with the Defendant’s daily cash report were precisely cut just before the cumulative total sales (NRGT), and only provided the sales figures by categories and payment methods. He noticed cumulative total sales were missing from the Z tapes. The change in cumulative total sales between two complete Z tapes provides the amount of receipts that should have been deposited. The accountant noted that the total sales (TS) provided on intermediate Z tapes did not equal the difference between the two cumulative total sales referred to above. See the forensic analysis on the example Z tape in Figure 1.

4. The accountant opined that his physical examination of the Z tapes suggested a logical cutting point to conceal the fraud scheme would be above the cumulative total sales and just below net sales.

5. The accountant demonstrated how overcharges could allow someone to take cash from the cafe and not reflect poorly on the cafe’s revenue. For instance, a customer is charged $5 for a sandwich that is normally sold for $4. The sandwich would be recorded in the register at $4,

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but $5 would be collected from the customer. This type of fraud scheme is known as sales skimming.

6. Accountant opined that the cafe suffered a cash shortage of approximately $250,000 between Jan. 1 and Sept. 21 of Year 3.

Facts Provided by Surveillance Investigator of Chip and Deal Casino

7. The casino investigator stated that Defendant held a “player’s club card” – obtained voluntarily by the patron; it tracks the patron’s casino activity and provides rewards or cash back based on number of points accumulated.

8. Printed coin-in reports show patron’s “coin-in” on slot machines. (“Coin-in” is the combination of actual cash put into slots and credits accumulated by winning.)

Investigator reviewed copies of Defendant’s coin in reports from the date she began using her “player’s club card” and copies of pay-out documentation for Years 2 through 4. The coin-in report does not give a breakdown of how much is actual cash and how much are actual credits accumulated by winning. Investigator stated that the report on Defendant’s card showed increased activity in Year 2 and Year 3. Defendant’s “Coin-in Report” shows in excess of $1.7 million in a combination of actual cash and reward credits for Year 3. Defendant converted her winning credits into cash. Casino payouts were made in cash for amounts less than $1,000 and by check for amounts in excess of $1,000.

9. Defendant’s winnings in Year 3 as she reported to the IRS were approximately $135,000. Defendant did not report any losses.

Facts Provided by Employees

10. The general manager stated that she told the Defendant to stop running two Z tapes on the cash register. The general manager stated that reported cash sales from the cash register doubled when two Z tapes were not run.

11. The accountant stated that the Defendant told him she ran a Z tape from the cash register each day to determine what food items sold and what she needed to order. General manager stated that Defendant was not the person who did the ordering of food. Another employee ordered food and stated that she did not use the Z tapes in determining how much and what food to order.

12. At work, the Defendant was observed exchanging higher denomination bills in the cash register with gambling winnings from her purse, so that cafe workers would not have to get change from the bank.

13. Defendant’s gambling activity increased in Year 2 and Year 3, but her earned income remained at $35,000.

Information Provided by the Defendant

14. Defendant stated that she cut the Z tapes for a study which was being conducted to cuts costs and waste in the cafe. After the study was done, Defendant admitted that she continued to cut the bottom off the Z tape to track inventory. She did not explain how the bottom half of the

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tapes had been removed just above the grand total amount or how the grand total amount was necessary for the study or for her ordering purposes.

CHARGES AGAINST BECKY

After reviewing the information from Sue and her accountant, coupled with their own investigation, the detectives arrested Becky McGill and charged her with embezzlement of $250,000, as well as other charges. Furthermore, the detectives contacted the Criminal Investigation Division of the IRS and requested them to begin an Income Tax Evasion case on Becky McGill.

The District Attorney needs assistance in developing an understanding of embezzlement. He feels that it may be too hard for the jury to grasp. He feels if the jury does not fully understand the count of embezzlement they may find her not guilty on all the other counts. The District Attorney engages you as a consulting expert accountant. Your task is to analyze the elements of embezzlement, and identify the facts that support the allegation, based on the investigation conducted by Sue’s accountant and the detectives.

CASE QUESTIONS

PART ONE.The purpose of this question is to examine why Becky committed fraud. The Fraud Triangle and the COSO Internal Control – Integrated Framework provide a useful way to analyze the facts.

a. Explain what perceived pressure(s) Becky may have faced. How might Becky rationalize her fraudulent actions?

b. Describe what factors in Howie’s Café system of internal control led to and facilitated Becky’s manipulation of the Z tapes and the theft. In your answer, fully define each of the five components included in the COSO Internal Control – Integrated Framework. The Framework, as updated in 2013, helps organizations design potentially effective internal controls. Relate your explanations back to the framework’s five components.

c. What could Howie’s Cafe have done differently to detect this fraud earlier or prevent it from happening?

PART 2.The purpose of this question is to demonstrate how a net worth analysis, a technique used by both the IRS and the Department of Justice, can show that there is income from unknown sources.

a. Using the information in Table 1, prepar