Darren Jones and AE&P Inc – A Story of Sticky Fingers Darren Jones has been the
ID: 2485267 • Letter: D
Question
Darren Jones and AE&P Inc – A Story of Sticky Fingers
Darren Jones has been the accounts receivable accountant at AE&P Inc. for 8 years. He has been a dependable employee who completes his work in a timely and professional manner. Darren gets along well with the other employees, has received recognition as employee of the month on several occasions, and is known as the top batter on AE&P’s softball team. Darren recently moved into a large new home in an upscale neighborhood. All seems to be going very well in Darren’s life.
At AE&P, the accounts receivable accountant (Darren) opens the mail, makes the cash deposit, and posts payments and invoices to the customer subsidiary accounts. Darren provides the general ledger accountant with the verified deposit slip from the bank to make the cash deposit entry on the general ledger and a schedule providing the revenue account amounts from the invoices for the daily customer billing entry . Each day Darren reconciles the general ledger accounts receivable amount to the total of the accounts receivable subsidiary ledger and reviews the customer accounts for any potential uncollectible accounts. If there is an account that is deemed uncollectible, Darren removes the customer’s account from the accounts receivable subsidiary ledger and provides the general ledger accountant with the information to prepare the write-off entry.
Five years ago, Darren encountered some very difficult financial circumstances in his personal life. He realized that without some additional source of funds he would have to file bankruptcy. He was desperate to resolve his financial crisis. He decided that he would “borrow” some funds from AE&P by taking cash from the cash deposit, covering his tracks by falsifying the posting to customer accounts. Darren convinced himself that if his supervisors knew of his financial distress they would gladly loan him the funds. Darren made a promise to himself that as soon as he could, he would pay the funds back. However, Darren found that he could not keep this promise as he continued to need additional funds to support his family. Over a period of five years, Darren diverted significant funds to himself, covering up the diversion either by misstating the customer accounts in the accounts receivable subsidiary ledger, recording fictitious discounts or returns for the amount of money diverted, or writing off as uncollectible the accounts of customers whose payments Darren deposited in his own personal account. As time passed Darren thought to himself that he deserved the additional funds he was taking from the customer accounts. After all, he told himself, he had worked hard for AE&P for many years without what he thought were the pay increases or promotions he deserved. Darren’s lifestyle had risen to a level that required he divert more and more of AE&P funds into his personal account on a regular basis. Darren’s fraud was discovered when he was unexpectedly out of the office for a couple of weeks following emergency surgery. Darren’s supervisor gladly took on Darren’s duties to help during Darren’s absence. While performing Darren’s duties, the supervisor discovered a variety of questionable entries in the accounts receivable subsidiary ledgers. Further investigation revealed that Darren had stolen in excess of $250,000 from AE&P Inc. through his accounts receivable fraud.
Required:
Apply the fraud triangle to the case clearly discussing each of the three elements in the fraud triangle using the specific details of the case.
(1) motivation through pressure to commit fraud
(2) opportunity through weak internal controls over accounts receivable
(3) rationalization to justify the fraud.
Explanation / Answer
THIS IS CASE IS VERY CLEARLY RELATED TO THE FRAUD TRIANGLE. THE THREE ELEMENTS OF FRAUD TRIANGLE ARE PRESSURE, OPPORTUNITY AND RATIONALIZATION ARE PRESET OVER HERE.
OVER HERE THE MOTIVATION TO COMMIT FRAUD WAS PROVIDED BY A SUCCESSFUL LIFE BEING SUDDENLY TURNED UP INTO A FINANCIALLY BANKRUPT CRISIS. THE THREAT WAS SO IMMINENT THAT THE DARREN WAS LEFT OUT WITH NO OPTION BUT TO FIND OUT THE FUNDS SOURCE IMMEDIATELY. HIS PERSONAL LIFE AND STATUS WAS AT STAKE. SO DECIDED TO EMBEZZLE THE FUNDS.
NEXT WE SEE FROM THE ABOVE CASE THAT THERE WAS NO INTERNAL CONTROLS PRESENT IN THE ORGANIZATION. THE ORGANIZATION WAS RUNNING THE ACCOUNTS RECEIVABLE PURELY ON BELIEF AND HONESTY OF DARREN. HE WAS FREE TO RECEIVE FUNDS, CHECK THEM ALL ALONE, DEPOSIT THEM AND TO SIMPLY PRODUCE A SLIP AT THE END OF THE DAY. HIS WORK WAS NOT CHECKED BY OTHER PERSONS. THERE WAS NO DIVISION AND REPETITIVE CHECKING OF THE PROCESS OF ACCOUNTS RECEIVABLE. HE WAS FREE TO GIVE DISCOUNTS OR NOTE DOWN SOME AMOUNTS AS BAD DEBTS AND SIMPLY PRESENT A STATEMENT AT THE END OF THE DAY TO RECORD TRANSACTIONS IN THE GENERAL LEDGER. HE WAS HAVING MORE THAN ENOUGH OPPORTUNITY AS REGARDS ACCOUNTS RECEIVABLE. THE OPPORTUNITY WAS PRESENT WITH EASE.
ONCE DARREN STARTED TO EMBEZZLE THE FUNDS AND WAS ABLE TO COVER UP THE TRACK, HE FOUND THAT NO ONE IS WATCHING HIS ACTIVITIES. DARREN WAS THINKING THAT HE HAS TAKEN A LOAN WHICH HE WILL REPAY SOON. HE WAS CAUGHT IN A CIRCLE WHERE HE WAS NEVER ABLE TO COLLECT ENOUGH FUNDS TO RETURN THE AMOUNT. HIS NEEDS KEPT ON GROWING AND THE SUM BECAME TOO LARGE TO BE RETURNED. DARREN STARTED TO THINK BY HIS OWN THAT NO ONE WILL OBJECT ABOUT THE MISAPPROPRIATION OF FUNDS.
THE PROMISE OF RETURNING THE FUNDS COULD NOT BE KEPT BECAUSE OF A LAVISH LIFESTYLE BEYOND THE MEANS TO SUSTAIN IT. HE STARTED TO THINK THAT HE DESERVES THIS AMOUNT, AND IT WAS NOT PAID TO HIM. THE FACT WAS THAT HE HAS BEEN CAUGHT IN THE FRAUD TRIANGLE.
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