1. In our opinion we think that the possibility of Jamel short-changinng is high. We have
indentified the fraud symptoms as below:
1. Unusual behaviour - Jamel’s body language
Unusual behaviour is seen through an individual's recognizable behaviour pattern to
attempt to cope with the stress. The guilty leads to fear; fear leads to stress; and stress
leads to behaviour changes. Research in psychology reveals that when a person,
especially a first-time offender, commits a crime, he or she becomes engulfed by
emotions of fear and guilt. Those emotions cause the individual to experience a
significant amount of stress, and in order to cope with the stress, the individual will
exhibit unusual and recognizable behaviour patterns. In this case, Jamel’s behaviour is
very suspicious.
First, body language such as the facial expressions and body posture can show people
emotion and thinking especially when someone is trying to lying to another. In the
meeting between Jamel and Mat Jon, Jamel’s reaction and expressions make him to
be suspicious that he is doing something wrong and trying intentionally to cover it up
from others knowing, especially his Pak Long, Mat Jon.
We can see that Jamel looked very worry and nervous. He even trying hard to look
confident, in order to not want his uncle to be monitoring the business closely and do
not want his uncle to know what exactly happen in the business.
Moreover, when Mat Jon question to Jamel the problem that he found in the business,
he do not trying to explain to Mat Jon, but he go immediately on the defensive by
saying that he is struggling hard to monitor and checking everything. He even is rude
to his uncle and stormed off from the meeting when he feels Mat Jon do not believe in
him. Lying will make someone feel uncomfortable and become flustered and upset in
order to cover up what he trying to.
Through all the expression of Jamel in the conversation, we can saying that he feel
guilty and afraid that Mat Jon discover that he is short-changing in the Spetrol Station
business.
2. 2. Customer complaint
Mat Jon’s petrol station was being complained by the customers that came to re-fuelling
his car at the petrol station. Although he has pay the enough money, but he
cannot get the equivalent quantity of petrol and had simply being ignore. This mean
that someone have trying to hide the sales and short-changing the money. Through
this, Jamel is the one have the biggest suspicious to do the short changing because he
is the one that have the full charge in the Spetrol Station business.
3. Shortfall in physical balance of unleaded petrol
From the stock balance report, we have found many suspicious figures and the
balance of the stock in the report is far lower than the actual balance that the company
should have. There are some shortfalls in the physical balance of the unleaded petrol.
The amount of daily pump sales of unleaded petrol in stock balance report and the
sales amount in station collection reports were appearing repeating figures that did
not make sense, especially the figures of station collection in 21 and 27 July 2009
were totally same. Besides that, the figures were repeating in the same sequence that
usually would not happen in sales transactions. For more clearly to understand the real
condition, please refer to Appendix 1 and 2 where already bolded the repeating
figures. Moreover, the figures in the physical stock balance had been altered
intentionally by someone to hide the real stock balance.
Jamel, who fully in charge in the petrol station, should have to concern about the
stock balance. Through this, we can assume that Jamel might be intentionally to
manipulate the figure in the stock balance report.
Besides that, in 16 July, the received of petrol do not recorded in the physical stock
balance, but the cheque was still paying out at the date. In 31 July, the same situation
also happen again, just the cheque is still not paying out yet. From this we can making
assumption that there actually do not have any receipt of petrol, and the cheque that
debit out is for Jamel personal use and in order to cover the short-changing, he create
a false record in the receipt of petrol.
3. 4. Insufficient amount in cash deposit
Compare the daily cash sales receive with the amount in the bank statement, we can
find that the cash sales that deposit into the bank are lower than the actual sales, in the
amount around RM2000 for every cash sales deposit. The amounts that do not deposit
maybe are the short-changing of Jamal because it is not very possible that the station
need to keep in such a big amount of petty cash in the station for the daily use.
Moreover, the bank account had already overdraft of RM21, 019.42, while the bank
overdraft facility is only can up to RM20, 000 and Jamal do not even report this
situation to Mat Jon. From here, we can making the assumption that Jamal do not
want Mat Jon to realise that there are something’s amiss in the business, especially the
short-changing of the cash.
5. Inaccurate sales record
Base on the station collection in July 2009, the daily sales collections were differ
much for 1 July to 31 July. The sales figures for first two days were reasonable good,
it was around RM32,000, but it was dropped significantly in the end of the month.
The sales were drop to RM14,000 in 31st July.
From the report, we found that there are some suspicious amounts in the 1st and 2nd
July. For example, in 1st July, the daily pump sales of unleaded petrol are equal to
RM34 458.68, already exceed the total sales of the day (RM 32 220.40) without
including the other revenues that generate by the station. This might be done
intentionally or unintentionally. The balance gone without any reason and this is the
possibility of fraud occurred.
Jamel cannot explain the unusual sales when Mat Jon questions him. It is suspected
that sales were take place but without recording. Besides that, the total sales for July
were RM 538,139.80. However, according to the July 2009 bank statement, the total
credit amount only RM409,375.68. The difference was RM128,764.12. In other
words, the bank should be having RM128 thousand credit balance instead of RM21
thousand debit balance (overdraft). The amount maybe misappropriate by the
management.
4. 6. Adverse relationship between sales and cost of sales and potential shipments of
petrol were missing
2006 2007 2008
Sales 6,804,000 5,443,200 5,170,040
Cost of Sales 5,987,520 4,898,880 4,964,198
Estimated Cost of Sales 5,443,200 4,354,560 4,136,832
Differences in COS (Actual - Estimated) 544,320 544,320 827,366
Shipment of Petrol
9.55 9.55 14.5
(Differences in COS/RM 57,002.40)
Table above shows that the sales are decreased and the cost of sales are increased
from year 2006 to 2008. By assuming the gross profit margin is maintain in 20%, the
cost of sales was increase from 10% to 20% which is equal to 9.5-14.5 shipments of
petrol.
This is another symptom of fraud. It was quite unreasonable that when the revenues
were declining, the cost of sales was climbing up. This relationship did not make
sense. It was because when the revenue was declining, the cost of sales should not
have much change and even have changes, it will just be low increment such as
affected by the government policy in setting the price of fuel (APM formula).
However, in this case, the increasing of cost of sales may be high possibility attributed
by the dishonest staffs in misuse the business money to buy the petrol and sold it to
third party privately for personal gain. Thus, the revenue was kept declining and cost
of sales was increasing. If this was real, then we can explain the missing petrol in the
stock balance report.
5. Horizontal Analysis
Item/Year 2004 2005 2006 2007 2008
Sales 100% 105% 94.50% 75.60% 71.82%
Cogs 100% 105% 103.95% 85.05% 86.18%
Gross Profit 100% 105% 56.70% 37.80% 14.36%
Common-size (horizontal) analysis took place to compare the performance of the company
from year 2004 to 2008. Common-size analysis expresses comparisons in percentages. Thus,
it makes the comparison more preferable and meaningful than absolute amount. By using
year 2004 as the selected base year, the performance of the company was getting worse since
years 2006. Gross profit decreased approximately 43% in 2006, 62% in 2007 and 86% in
2008 (compare with year 2004).
The main concern is on the changes in the percentage of cost of sales. Cost of sales increased
slightly in year 2006 despite the gross profit slash 43% (in comparison with the base year,
2004). In addition, the gross profit for year 2007 was only 37.8% compare with year 2004,
but the cost of sales was 85% compare with the base year. Badly, the gross profit further
decrease in year 2008 to only 14% compare with year 2004, but the cost of sales increased
slightly compare with year 2007. There are three possibilities caused the problem:
No record for sales
The main concern’s here and the most probable reason for decrease in profit is there was a
fraud. In terms of percentage, the decreased in sales was relatively greater than the decrease
in cost of sales. In comparison with previous year figure, the sale decreased significantly
(10% in 2006, 20% in 2007, and 5% in 2008), but the cost of sales decreased relatively
slightly (1% in 2006 and 18% in 2007) and increase again in 2008 (1%). This may due to the
unrecorded sales. The cost of sales was incurred and recorded as expenses despite the sales
figure was manipulated by the management, in this case, Jamel. Thus, it leads to drop of sales
and increase in cost of sales and further slash the gross profit.
6. Increase in cost of sales
According to the horizontal analysis above, the sales decreased more than cost of sales. For
instance, the sales in year 2008 were 72% compare with base year. However, cost of sales
was 86% compare with the base year. This reflects that the cost of sales was relatively higher
than the sales made. High level of inflation may increase the cost of petrol thus leads to
decrease in profit.
Competition
The increase of competition since the second petrol station and third petrol station was
opened next to Mat Jon’s petrol station in year 2006 and 2008 respectively. Thus, this
affected Mat Jon’s business, the consumers have more options to get service in others petrol
station.
12. Irregularities In Sales And Cost Of Sales
From the case, Mat Jon realized that in the financial statements, the revenues were going down
but the cost of sales was steadily climbing up, there seems to be something wrong in it. Although
there are competitors like Caltex and Petronas, it is impossible for the revenue to go down so
drastically and the traffic volume is also high in that area, so it couldn’t affect so much on it.
This situation happened because someone was doing fraud. When sales were incurred, person
who is responsible didn’t record the transaction. It might be also cost of sales is incurred because
might be someone recording expenses that are not related to the cost of sales in the company.
Below is the table that shows how the profit decreases dramatically.
Gross Profit Margin Table
Item/Year 2004 2005 2006 2007 2008
Sales (A) 7,200,000 7,560,000 6,804,000 5,443,200 5,171,040
Cost of
5, 760,000 6,048,000 5,987,520 4,898,880 4,964,198
Sales
Gross profit
(B)
1,440,000 1,512,000 816,480 544,320 206,842
Gross Profit
Margin (B/A
x 100)
20% 20% 12% 10% 4%
To prevent this kind of thing from happening in the future, regular independent checks by an
accountant on the financial statements should be done to ensure that there are no irregularities
in it. This is to make sure that the manager is doing his job honestly. If there are any
irregularities in it, the accountant can discover it quickly and inform Mat Jon about it.
The significant differences in inventory in hand and inventory in record
According to the stock balance report (Unleaded Petrol), July 2009, there seems to be a
difference between the records and physical balance. Surely there is something wrong as huge
differences means there is a possibility of fraud. Based on Mat Jon, he found that some numbers
was very odd; in fact the balance is far lower than what Spetrol should have. Usually, the person
that can alter the records must be both responsible for recording the inventory in hand and in
record.
13. Stock Balance Report (Unleaded Petrol), July 2009 (Audited)
Date
July
2009
Daily
Pump
Sales
Receipt
s
Physic
al
Stock
Balanc
e
Physical
Stock
Balance
(Audited)
1 13647 32760 25131* 27162*
2 14701 10461 12461*
3 7542 4919 4919
4 6199 32760 28480 31480*
5 7973 23507 23507
6 5420 18087 18087
7 3647 14440 14440
8 8701 32760 34499 38499*
9 5542 32957 32957
10 2525 30432 30432
11 1973 23459 28459*
12 1420 32760 49799 59799*
13 8647 50152 51152*
14 4701 46451 46451
15 7542 38909 38909
16 6199 32760 32710 65470*
17 4973 27737 60497*
18 5420 22317 55077*
19 3647 18670 51430*
20 8701 9969 42729*
21 5542 32760 37187 69947*
22 2525 34662 67422*
23 4973 29689 62449*
24 611 29078 61838*
25 3647 32760 58191 90951*
26 5701 52490 85250*
27 5302 47188 79948*
28 2525 40633 77423*
29 1973 32760 55450 108210*
30 1420 50404 106790*
31 3651 32760 38960 135899*
From the table above, we can see that there are differences between the original physical stock
balance and the audited physical stock balance.
So the solution is that there must be segregation of duties between these two tasks. The concept
of segregation of duties is to having two people do a task together or splitting the task into parts
so that no one person handles the complete assignment. One person has to be responsible for the
recording of the physical balance and the other one is responsible for recording the book.
Other than that, the supervisor can also monitor the employee’s actions. When the supervisor
is monitoring him, chances for fraud to occur will be reduced. With this, the employees that have
14. any bad intention will be afraid that they will be caught and lose their job. The monitoring can
be done by supervisor to make sure the stock is in a good condition .By monitoring, we can
easily know the status of our stock. Besides that, by implementing physical safeguards such as
locks, keys, safes and fences to prohibit to access to the stock is also a good prevention.
Irregularities in the sales collection
Based from the station collections on July 2009, we can see that the sales from RM32, 000 plus
in the beginning of the month decrease to RM14, 000 plus in the end of the month. The sales
decreased by more than 50% from its original amount. That is really surprising as something had
gone wrong. Normally, even there are competitors; the sales can’t decrease so drastically.
Furthermore the price of the petrol is controlled, so it is less likely to affect the sales figure. In
addition, the station is located beside the BPK highway where the traffic volume is high. Surely,
the possibility of fraud is there.
In order to solve this, a good documentation should be in place assuming that before, the
management don’t really organize the documents especially sales receipts properly. All the
documents should be place in a cabinet and organized according their preference, for example by
dates. A systematic filing will help them to avoid losing any important documents. By having a
good documentation, Mat Jon can keep track of all the sales and he can easily check if there are
any discrepancies in the sales record. This will also ensure that time is not wasted in finding the
documents when needed. All these suggestion will help to eliminate any opportunities in doing
fraud.
Problems with the bank overdraft limit
According to the bank statement on July 2009, the closing balance is RM (21, 019.42) which is
really absurd because as stated by Mat Jon, the overdraft facility is only up to RM 20, 000. One
reason that this could happen is authorization is also given to Jamel, and this allow him increase
the overdraft amount. Probably the approval by either one of them (Jamel or Mat Jon) is
sufficient enough to grant the overdraft increase.
In order to prevent this from happening in the future, Mat Jon should ask the bank for dual
authorization so that Mat Jon is aware of what Jamel or the new manager (if Mat Jon decides
replace his nephew) is doing. From there, without Mat Jon authorization, the approval for
overdraft increase will be rejected.
15.
16. Selling the business to Robert or Continue to run the business
In this issue, Mat Jon need to consider whether continue to run this business but take over the
management from Jamel or was he better off selling the business to Robert. To make the
decision, we shall take a first look at the pros and cons of both choices. The following discuss
whether Mat Jon should continue the business or selling the business.
Selling the business to Robert
· Avoid from the current business problems
There is few reasons lead Mat Jon selling the business. First at all is Mat Jon can avoid from
the current business problems such as the problems in total sales and the cost of sales figures,
the shortfall in the physical balance of the unleaded petrol and so on. If Spetrol’s management
was successfully to solve all the problems, company’s financial position can be improved.
Otherwise, all of these problems might lead business to a more worse condition.
· Mat Jon are getting older
Mat Jon and his wife are getting older so he asks his nephew, Jamel to manage the business.
After that, Mat Jon had not paid much attention to the business because he assumed that
Jamel was managing fine. Now he realizes that Jamel was not managing the business well
and lead the business in a worse condition. So, if Mat Jon decides to sell the business to
Robert, he does not have to worry about the business problems. And then, Mat Jon has no
debts, can live comfortable and can spend more time with his family.
· Competitions
Besides, since the places of the Spetrol where it located between the Petronas and Caltex,
these two well known competitors might definitely threathen the Spetrol’s business in long-term.
This can reduce the possible of profits where the company is currently enjoying in
future. So, this is a strong reason that Mat Jon should consider to sell the business.
17. · Rebuild reputation
Next, by selling off the business, Spetrol can instead rebuild its reputation. This is because
Mr. Robert Leung is very confident about himself in handling those problems faced by
Spetrol. This can avoid Spetrol is being liquidated and at the same time the Spetrol’s brand
could be sustained. Thus, it can result in customers’ retention towards the company’s brand
and images.
Summary
Spetrol station is sandwiched between the two newer ones, which were operated by Caltex
and Petronas. This really affected Mat Jon’s business. During the morning rush hour had a
choice to turn to if there was a long queue at their petrol station. Besides, Jombeli store had
been showing sluggish sales of late. Moreover, it is suspected that Jamel involve in fraud or
defalcation in the petrol station’s income. Therefore, it is better for Mat Jon to sell the
business to Robert and Robert was fully confident he would be capable to turn around the
business. Furthermore, Mat Jon will not create a rift between him and his sister and brother-in-
law and can avoid all of the current problems of his business.
Continue to run the business but take over the management from Jamel
· Strategic location
Mat Jon also should not closed his business because his petrol station is situated a strategic
areas. That petrol station is closed to BPK highway and at Bintang Town that have three
residential areas which is Taman Sinar, Taman Matahari and Taman Bulan. There were also a
primary and secondary schools in the nearest and several rows of shop. On the eastern side
also has industrial area with a number of electronic factories and warehouses. 30kms from the
highway also situated a low cost air terminal.
· Many target customer
18. Mat Jon can have many regular customers such as vehicle from residential areas, taxis from
the air terminal, school buses from factory, primary and secondary school and also lorry from
and to the factories and warehouse. At Jombeli also have snack food that can be buy student
from nearest schools. Worker at that electronic factory also can by prepaid telephone at
Jombeli.
· Potential Business
Robert Leung was a successful entrepreneur and already owned two Spetrol outlets in the
Klang Valley and wish to buy over Mat Jon’s business by giving an offer. Robert was calling
Mat Jon almost every alternate day to try and persuade Mat Jon to sell off the business.
Indirectly, it shows that Spetrol station is a potential business if not Robert will not keen to
buy over the business by given an offer and pestering Mat Jon regarding the matter.
· Product diversification
Mat Jon should continue his business because his products are diversifying into many types
such as fuel, retail sales and manual car wash service. His business can satisfy his customer
based on product them sales for example of fuel that he sales is petrol for people who are
using car and motorcycle. Diesel fuel also will satisfy transport like bus or lorry and NGV
will satisfy vehicle like taxi. He also have retail sale store, Jombeli that sales items such as
pre paid telephone cards, bottled water, lubricants, newspapers and snack food
Summary
Mat Jon should continue the business because Spetrol station is located in a strategic and
convenient location with the high traffic volume. So, there is a reason why Robert is so keen
to buy the petrol station by giving an offer even he know about the condition of Mat Jon’s
business. With this reason, Mat Jon should not sell off the petrol station because it is a
potential business nad able to yield a high profit. Mat Jon should implement the control
mechanism as discussed above to protect the business and to prevent a recurrence of the
19. current problems, but not sell the business. Mat Jon should face and resolve the problems
arise and also improve the management of control in his business.
