Fraud Examination Report
1. Introduction
The fraud examination report relates to an investigation conducted on the acts of Daisy Sefton, a bookkeeper for CarpetCircuit Décor Company. The owner of the company, Jack full trust in Daisy and could not suspect her for any wrongdoings. However, after an anonymous mail and letter from the bank about the concerns on the exceeding line of credit, Jack contracted Rest-Assured Security firm to conduct fraud investigation on the company staffs. Customer complaints about the quality of the marble tiles also raised suspicion on potential foul play and problems in the company’s operations. The investigation narrowed down to Daisy due to her recent behavior and acts that where unusual. Daisy was not acting in recent times he experienced emotional breakdowns showing certain problems. The investigation team reviewed the inventory records, bank financial statements, and conducted interviews of the company’s employees to determine the potential fraud actions in the company. Computer-based investigations were also conducted by a forensic IT analyst, Agnus who was part of the investigation team. Therefore, the report will reveal the capability of Daisy Sefton on the fraudulent activities in the company that led to serious problems to the reputation and financial performance of the company.
2. Background
On a mid-morning, Jack received a letter in his office from Carol marked ‘FINAL NOTICE.’ The letter warned about the exceeding of line of credit above $300,000 and it was overdrawn by $50,000. Jack was not aware of the overdrawn line of credit. Jack also got another letter addressed directly to him and it includes a torn page with words “BE CAREFUL! WATCH YOUR STAFF.’ Jack was also aware of the various complaints about the quality of the marble tiles. The observations of Jack about the behavior of Daisy and coupled with the anonymous letter created a cause for concern for the company (Purda, & Skillicorn, 2015). In spite of having information and suspicions, Jack contracted a fraud investigation company that includes the assessment of the records and the interviewing the right personnel.
3. Executive Summary
The fraud investigation started when Jack received an anonymous email to watch the actions of the staffs in the company. The email did not provide any information on the allegations or the suspected employees. However, a letter from the bank raised concerns about a bank overdrawn from the normal line of credit of $300,000 by $50,000.The issues raised a valid point for performing comprehensive fraud investigation on the employees and the operations of the company. Jack contracted Rest-Assured Security to perform investigation on the activities of the employees. Jack also reviewed the HR records of all employees in the company to ensure that every employee was performing their roles and responsibilities well (Jackson, 2015). The fraud investigation team from Rest-Assured Security Company and external accountants were contracted to conduct a review of the records and interview the key suspect, Daisy Sefton regarding the suspected fake scheme in the company.
The investigation team reviewed the bank accounts and financial records, personnel information, and computer records for Daisy Sefton and Andy to determine the potential fraudulent actions happing in the company (Jackson, 2015). After the getting adequate research information and records, the investigation performed an interview of Daisy Sefton, the bookkeeper who was accepted culpability for the fraudulent actions and mistakes in the operations of the company.
The letter of engagement for the investigation company included various guidelines that include the need to reduce the costs associated with the investigation process. The investigation firm was to conduct an evaluation on the Accounts and the Warehouse of the company. The process would help in the retracing of the activities of the company in the last two years unless the company would call for additional investigative analysis over a longer duration. Jack Walker and the investigation team agreed to create a cover story that the team was reviewing a potential partnership with Heavenly Clouds Interiors, an interior decorating corporation.
The strategy was useful in reducing potential disruption and unrests from the employees of the company to undermine the investigation process. The investigation team included eternal experts and internal employees with the company to help in getting the appropriate and sufficient evidence on the potential fraudulent activities. Some of the recommended actions to take in dealing with the potential fraud the verification of the general ledger accounts, conducting of physical inventory counts as well as setting proper requirements for the invoice receipts and records.
4. Scope
The goal of the fraud investigation team was as below:
• To assess the potential fraudulent activities and employee sabotage of the operations of CarpetCircuit Décor Company. The investigation was based on a line of credit concern by the bank and an anonymous mail send to Jack on the suspected staff misconduct in part of Daisy Sefton, a bookkeeper for the company.
5. Approach
Fraud Investigation Team Members
Chase Klim, Jasper Binchy, Locksmith, and Angus,
Procedures
• As a part of the investigation process to these issues, the investigation team reviewed the various actions:
• Obtained and assessed the letter for the bank about the line of credit concerns against the set company’s line of credit and guidelines.
• Obtained and assessed the inventory records of the marble tiles and financial invoices including the bank statements, invoice records, and the reconciliation reports in the company.
• Obtained and evaluated the inventory counts from the Décor warehouse and whether the inventory count was aligning with the company’s inventory records.
• Performed computer-based investigations on Daisy’s and Andy’s computer to get more evidence on the financial records concerns.
Individual Interviewed: The following person was questioned about the potential fraudulent actions in the company by the investigation team:
• Daisy Sefton
6. Findings
In terms of the interviews done, information reviewed, and computer forensic audit conducted during the fraud examination period, the investigation teams was able to determine as follows:
• Did the investigation team of potential fraud confirm any existence of fraudulent activities of CarpetCircuit accounts and warehouse operations?
Yes. The information and records assessed and interviews done by the investigation team was able to determine that Daisy Sefton and Pham Anh, Andy were involved in a fraudulent scheme that led to the loss of thousands dollars for the company over the last few months. During the fraud investigation process, the investigation team review financial documents and performed interviews to prove the suspected fraudulent activities at CarpetCircuit (Young, & Peng, 2013).
The following is a report summary of the information that supports the investigation team’s findings about the potential fraud:
The first issue was the exit of long-time employee, Daniel from the company. Daniel has been working in the Décor warehouse for more than 20 years and was responsible for the delivery of carpet and tiles, the stacking of the carpet tools as well as the organizing of the tiles. Daniel was dedicated and committed to his responsibilities and roles in the organization until Pham Anh, Andy arrived in the organization. Andy reduced his responsibilities and always excluded Daniel from the critical roles relating to the warehouse operations. Daniel was uncomfortable and left the job.
In the last few weeks, the company reported complaints about the quality of the Marbles. The complaints come from its two tilers, Stewart and Ralph. Another complaint was from Mrs., Beatty a faithful client who claimed that the tiles were looking cheap and did not match the quality of the tiles displayed in the showroom (Zainudin, Zainudin, Hashim, & Hashim, 2016). In response, Andy argued that the marble might be slight different because they come from a different area of Caverra quarry in Italy and there was no any significant problem.
Another concern was with bookkeeper, Daisy Sefton who had worked for the company for 20 years. Daisy was always focused on his work and was always punctual. She was involved in the management of the sales transactions, employee salaries processing as well as the management of pay sheets. Suddenly, Daisy had changed her hairstyles and she had episodes of emotional breakdown and abuse from the officer. Even two warehouse employees, Simon and Ralph were complaining about being paid their salaries in time. It is because Daisy was absent from the office to process their salaries. Daisy had also requested for a pay rise of $10,000 per year which was a serious concern.
On last Thursday of the following days, Daisy was still missing in the office and Carol received a mail that he delivered to Jack’s office. The letter was titled ‘FINAL NOTICE.’ The letter was from Bardigo First Bank where the company was holding its accounts. The bank had advised the company that the line of credit that was limited to not over $300,000, but it was overdrawn by $50,000. Jack was surprised because the line of credit had only been set up in the last two years on the recommendation of Daisy for offsetting uncertain contingencies (West, & Bhattacharya, 2016). Going through the mail, Jack also found another letter that included a torn newspaper page with the wording ‘BE CAREFUL WATCH YOUR STAFF.’ Jack did not know the person who had the send the warning to him.
While taking Daisy’s handbag to her home, he was directed to her sister’s house, Rose. After arriving at Rose and Andy’s home, he was completely surprised at the luxurious mansion which Andy was living in consider that with his salary of $110,000 per year, he could not afford such a house. The house was also lavishly furnished raising eyebrows on the capability of Andy in a fraud conspiracy against the company.
On a Thursday morning, an investigation process of performing inventory accounts was performed in the absence of Andy. The following was discovered:
• Jasper discovered 500 box units coded and with a marking ‘Carverra marble’ that were set aside and packed in a located area of the warehouse.
• After the assessment of the coded 500 units, Jasper determined that only 25 units of the boxes were packed with marbles and the rest 5475 units were empty.
An investigation on Daisy’s locked file cabinet by Locksmith was able to determine the various findings:
• Locksmith found a large unit of blank letterheads of Carverra Marble. The review of the restricted files revealed 30 completed invoices with ‘Carverra Marble’ letterheads to the company for amounts from $25,000 to $100,000 for the marble tiles.
• The invoices were also created by word processor with sequential numbers and registered address, P.O.BOX, Beecroft. The invoices were recommended to be paid to the Carverra Marble Account, Eastpac Bank Account No. 203465.
• 42 blank cheques of CarpetCircuit Décor were also found in chequebook and company’s NCR receipt books. Further examination of the receipt books revealed that the receipt was not aligned with the printed blanks.
After Thursday’s investigation, the investigation team also conducted a cross-check with the invoices records in the company and Daisy’s ATM visa address and the following findings were revealed:
• There was an issuance of fake invoices to the company’s décor for marble supplies, which were not delivered to the décor warehouse as per the recollection of Jack Walker.
• Jack also determined that the $25,000 to $100,000 for marble tiles as recorded in the “Carverra Marble” letterheads aligned with the normal cost price for the units of authorized Caverra Marble tiles.
• The review of Daisy’s Eastpac ATM Visa card address determined that the address aligned with the Marble Impressions Account address revealed that Daisy Sefton was part of the fake vendor scheme.
• The suspicious information in the invoices revealed that “Carverra Marble Company records do not comprise of any phone number or email address. No possible website or phone number records were available about Carverra Marble Company.
According to the Australian Taxation website, Carverra Marble did not have any Australian Business Number and the number provided by the letterheads of the company was false. The lack of number made it difficult to determine whether Daisy was involved in the fraud scheme alone or she was working with another employee. It was suspected that Daisy was an intermediary in allowing an unauthorized company to issue invoices on the supply of marbles and allowing the company to be included in the accounts payable system (Wells, 2017). However, these allegations needed further investigation.
On Saturday, the investigation team contracted their IT specialist, Angus to perform a computer-based investigation to get sufficient information and evidence to give a cause for concerns about whether the allegations against Daisy were true or false. After the investigations were done, the specialist also turned to the computer of Andy and comprehensive investigation was done well. The investigation, ‘Operation Caverra’ was able to locate three areas of asset diversion including sales fraud, billing fraud, and supplier fraud (Omar, Koya, Sanusi & Shafie, 2014). Carverra was determined to be a fictitious supplier. The investigation teams also determined that the accounting system of the company had insufficient separation of duties and responsibilities that allowed for potential fraud.
After two months of the suspected fraud, the investigation team was able to conduct an interview with Daisy. Daisy was questioned by the chief investigator about the potential fraud activities in the company. The interview revealed the following:
• Daisy accepted to be aware of the invoices that were recorded to be payable to Carverra Marble and she accepted to authorizing the payments. However, she was unable to justify the $3,500 difference early noted between the invoices in the office and the bank statement records.
• After the confrontation about the fake vendor account, Daisy had an emotional breakdown and said that she was sorry and did not have excuse for her actions. She explains that she has been feeling very lonely and did not have adequate finance to travel overseas and meet new people. She also revealed that she was responsible for the charging of extra 10% of orders as a service fee to improve the processing of the orders quickly. She insisted that no any other employee was involved in the fraudulent actions leading to the loss of money and quality complaints from the customers.
7. Summary
The report reflects that Daisy Sefton, the bookkeeper for CarpetCircuit Décor Company was involved in fraudulent activities such as the use of a fictitious supplier, Carverra Marble. It was noted that Daisy had added 10% to the amounts indicated in the invoices of Carverra Marbles and CarpetCircuit Décor Company was making payments to Hornsby Storage Units as an agent of Carverra Marble. However, Daisy claimed that Andy was responsible for creating Carverra Marble vendor. Fraudulent payments from the account of CarpetCircuit Décor to Carverra Marble of $38,500 from August 1st to 22nd August, 2017 also raised questions.
The differences between the invoice records of Carverra Marble in Daisy’s office and the payments made for the numbered invoices as in the Bardigo First Bank statement also pointed the unethical actions of Daisy. For instance, Invoice No. 00012 of Carverra Marble was documented to e $35,000 in the records in Daisy’ office. However, the bank statement noted that the payment for the invoice was $38,500 which is $3,500 higher than the invoice record. All recorded payments send to Carverra Marble include an additional 10% to each payment made. Daisy was unable to explain the difference even after several attempts for response. The interview of Daisy Sefton by the chief investigator provided collaborating evidence because she was unable to clearly and satisfactorily explain the noted fraudulent accounts and operational activities.
8. Impact to CarpetCircuit Décor Company
In the last few months, Daisy’s actions of creating fake vendor accounts that led to loss of potential revenues for the company. The complaints of quality from the key customers also affected the reputation of the company. With the deteriorating quality of the marble tiles, it might have led to reduced revenue potentials. Extra finances were lost through Daisy’s fake vendor account and the charging of 10% to the suppliers orders. For example, a difference of $3,500 was recorded and Daisy did not have any proper explanation of the difference (Guragai, Hunt, Neri, & Taylor, 2015). The line of credit of the company was also overdrawn by $50,000 against the set limit of $300,000 line of credit for the company. Therefore, the fraudulent actions of Daisy had brought financial problems and reputation damage to the company.
9. Recommendations
CarpetCircuit Décor Company did not have proper policies and procedures to install proper segregation of duties and the accounting systems was weak. Only Daisy Sefton was aware of the accounting records and systems. Jack trusted the bookkeeper enough not to question his ability to perform the accounting roles well. It is recommendable for the company to install proper internal controls and regular assessment of the internal controls to ensure that future fraudulent actions do not occur in the company.
Apart from the installation of the internal controls, it is recommendable to improve the segregation of the duties. Initially, Daisy was allowed to perform all matters relating to accounting for the inventory, salaries, and the profits of the company. Having such power gives her the power and opportunity to manipulate the inventory records for her benefits. The segregation of the duties would include the hiring of a new account assistant and personnel to help with the accounting records (Shukla, 2014). It would also ensure the timely updating of the inventory records that is critical in improving the accounting process. Carol should be made part of the confirmation and recording process of the inventories.
The proper approval of the transactions would also help in improving the placing of the orders well. Independent checks of the financial records and inventory records should also be conducted regularly. Jack should regularly hire external auditors to help in reviewing the operational aspects and accounting records of the company (Dalnial, Kamaluddin, Sanusi, & Khairuddin, 2014). For example, the company can contract quarterly audits to determine whether the employees are performing their work well and no any potential fraudulent schemes can occur in the company in the near future. Other controls that are recommendable include the verification of the general ledger accounts, physical inventory counts and having proper requirements for the invoice receipts and records. It helps to eliminate the risk of fake and fraudulent cheques and invoice records in the company in the future.

References
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