Fraud Symptoms

Fraud Symptoms (graded)
The risk of fraud is great in the local doughnut shop in Chapter 5, Case 1, page 161, or so it seems! What is your opinion? Do you see any symptoms of fraud here? If this were your doughnut shop, what would you do when you spotted these symptoms of fraud?
Case 1
Cal Smith Jr. is the night manager at a local doughnut shop that is doing very well. The shop sells doughnuts 7 days a week, 24 hours a day. Cal runs the graveyard shift by himself, since none of the other employees want to work at night. Since opening six months ago, Cal has not been able to find anyone to work for him and therefore has never missed one day of work. Cal makes his deposit every morning before going home.
Cal feels that he is overworked and underpaid. The franchise owner, Kenny Jones, has praised Cal for his hard work and dedication to the company. Kenny’s only concern is that, once or twice a week, an entire batch of traditional glazed doughnuts has been thrown away because of over-baking. Despite these problems, Cal maintains a clean work environment and is considered a valuable employee.
Recently, Cal has yelled at people on shifts before and after him for seemingly insignificant reasons. He was hired as manager because he gets along with everyone and is usually easygoing. His recent irritability could stem from the fact that business is slowing down and he does not have much interaction with anyone at night. He also has been complaining that he has not been getting very much sleep. One day, Cal came to work in a new BMW M3, the car of his dreams. Cal said that his dad helped him buy the car.
1. What areas of the business are most at risk for fraud?
2. Identify any symptoms of fraud that appear to exist at the doughnut shop.
3. What steps could be taken to reduce opportunities for fraud?



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Class, please read Chapter 5, Case Study 2, on pages 163 and 164. What are the symptoms of employee fraud? If you suspected a fellow employee was committing employee fraud, what actions would you take? How can the company in the case study protect itself from such fraud?

Case 2
James Davis owns a small Internet service provider business. Recently, customers have been complaining that they are overcharged and are not receiving timely customer service. Billing rates seem to increase without notice.

Five years ago, James used funding from several different investors in order to start his Internet service. Currently, he has 17 outstanding bills to be paid, all with late charges. Five of the bills include notices stating that lawsuits are pending. Also, he has not paid dividends to investors in two years.

Every day, James drives either his Mercedes Benz or his new Lexus to work. Before starting the business, James drove only one car, a Suzuki Samurai. James now lives in a palatial home and owns very expensive furniture. Employees constantly ask James for new equipment, but the “boss” refuses to update the old equipment. Two weeks ago, James was irate and fired one of his accounting clerks for not depositing some checks on time. James is known for losing his temper.

1. Discuss any fraud symptoms that are present in this case.

2. Why would complaints from customers be a fraud symptom?


Who is in the best place to detect employee fraud? The auditors? Management? Fellow employees? Why?


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