After reviewing the case presented to us it is clear that there are quite a few issues with
how this company is operating. The first instance and possibly the most threatening for
fraudulent activity would be the 3 managers and their responsibilities. Each manager has
complete control over the day-to-day activities in the shop, including sales and promotions. For
one person to be in charge of these activities leaves offers them a perfect opportunity to steal or
misstate financial statements. Another major contributor to a potentially fraudulent situation
would be that each manager is motivated by potential bonuses if their locations perform higher
than the other locations. This coupled with potentially frustrating/ annoying tasks like delivering
products in a blizzard could lead to corners being cut. So while the managers push the
employees to work harder for higher profits the employees feel they are being overworked and
pressured to do things they cannot physically do. Finally, the biggest problem that the company
faces when it comes to potential fraud would be the pressure placed on them by the bank they
have a large loan through. The company must jump through several hoops like providing
audited financial statements within 90 days of the fiscal year-end. The Bank also demands that
they submit unaudited financial statements 45 days before each quarter-end. This wouldn’t be
an issue if it wasn’t for the bank’s final requirement. If income is less than 0 at any time on the
financial statements, the bank holds the right to demand the entire balance immediately which
could force the entire company into bankruptcy. This causes an unbelievable amount of
pressure on those in charge of earning profits for the company. The pressure that could mean
the annihilation of their career as manager at this business, along with many of their employee’s
jobs. So it would be easy for them to rationalize misstatements on financial statements, to
protect their company and fellow coworkers from potentially losing everything.
Our expectations for the data we received would be major increases in sales during the winter
seasons. We also expected to see fewer sales in the northern locations during heavy
snowstorms, since there would be no way for the customer to get to the location or the
employee to the customer.