Investigation 6 Fraud Investigation Paper Name Class Date Professor Fraud Investigation Paper The investigation of allegations against a plant employee of an acquired corporation, Lakes Inc has resulted in the discovery of falsely submitted expense claims. The investigation began after an anonymous tip was sent to officials in the company. The tip was received by the company on June 12, 2007. The tip stated the purchase for a computer server was fraudulent and a television had actually been purchased in its place. Upon further investigation, the company discovered there was no new computer server bought and in fact the purchase had been for a high definition television. The company hired an investigator and began to search for the culprit of this known fraud. It is important for companies to have protection in place to protect against acts of theft or fraud. It is estimated that one third of employees will commit an act of fraud against their place of employment (Wells, 2001). Smaller companies are more directly affected by these acts. Responding to these demands requires the auditor to have a thorough understanding of the misappropriation of the assets and fraudulent disbursement schemes. Although "internal theft" and "employee fraud" are commonly used, a more encompassing term is "asset misappropriation"(Wells, 2001). Asset misappropriation occurs when an employee uses company supplies or equipment to commit acts of fraud or for personal usage. Fraudulent disbursement schemes are any ploy that is used to steal or misuse the assets of the organization. The assets can be stolen in the form of cash, falsifying expense claims, and stealing inventory. Disbursement fraud is crimes were an employee manipulates receipts in order to have the company pay for a personal item for the employee. In the case of the fraud being committed at Lakes Inc, the investigator began the investigation in August of 2007 and the investigation was completed by November of 2009. During this time the investigator discovered the purchasing officer, Bob Smith, and his administrative assistant, Mary Bad, had developed a scheme to create false invoices that were masked as company purchases but were in fact personal items purchased for the purchasing agent and their assistant. The scheme involved purchasing the item with a company credit card and then creating a false invoice for the purchase and discarding the original copy. Once the investigator made these discoveries he contacted the vendor, Sterns, and verified that the invoice number on the file copy matched on the invoice they had for the sale of a high definition television. The investigator examined the physical assets database. Lakes, Inc. maintains a physical asset database in which all non-disposable items with a purchase price of $1,000 or more are recorded. Each item is assigned a unique ID number and barcode label, which are used to track the item. The datab.

1. Investigation 6
Fraud Investigation Paper
Name
Class
Date
Professor
Fraud Investigation Paper
The investigation of allegations against a plant employee of
an acquired corporation, Lakes Inc has resulted in the discovery
of falsely submitted expense claims. The investigation began
after an anonymous tip was sent to officials in the company.
The tip was received by the company on June 12, 2007. The tip
stated the purchase for a computer server was fraudulent and a

2. television had actually been purchased in its place. Upon further
investigation, the company discovered there was no new
computer server bought and in fact the purchase had been for a
high definition television. The company hired an investigator
and began to search for the culprit of this known fraud.
It is important for companies to have protection in place to
protect against acts of theft or fraud. It is estimated that one
third of employees will commit an act of fraud against their
place of employment (Wells, 2001). Smaller companies are
more directly affected by these acts. Responding to these
demands requires the auditor to have a thorough understanding
of the misappropriation of the assets and fraudulent
disbursement schemes.
Although "internal theft" and "employee fraud" are
commonly used, a more encompassing term is "asset
misappropriation"(Wells, 2001). Asset misappropriation occurs
when an employee uses company supplies or equipment to
commit acts of fraud or for personal usage. Fraudulent
disbursement schemes are any ploy that is used to steal or
misuse the assets of the organization. The assets can be stolen
in the form of cash, falsifying expense claims, and stealing
inventory. Disbursement fraud is crimes were an employee
manipulates receipts in order to have the company pay for a
personal item for the employee.
In the case of the fraud being committed at Lakes Inc, the
investigator began the investigation in August of 2007 and the
investigation was completed by November of 2009. During this
time the investigator discovered the purchasing officer, Bob
Smith, and his administrative assistant, Mary Bad, had
developed a scheme to create false invoices that were masked as
company purchases but were in fact personal items purchased
for the purchasing agent and their assistant. The scheme
involved purchasing the item with a company credit card and
then creating a false invoice for the purchase and discarding the
original copy. Once the investigator made these discoveries he
contacted the vendor, Sterns, and verified that the invoice

3. number on the file copy matched on the invoice they had for the
sale of a high definition television.
The investigator examined the physical assets database.
Lakes, Inc. maintains a physical asset database in which all
non-disposable items with a purchase price of $1,000 or more
are recorded. Each item is assigned a unique ID number and
barcode label, which are used to track the item. The database is
maintained by the administrative assistant. The investigator did
not find a record of the purchase of the computer server in the
database and an id number had not been assigned to this
particular type of office equipment.
The investigators next step was to do a face to face
interview with the manager of the vendor, Stern. Stern was a
trusted vendor who had been an approved by the company since
May of 2005. The manager of Stern, Ted Jones, advised the
investigator of the suspicious behavior of Bob Smith over the
last six months. He claimed Smith had made several orders over
the last six months that he insisted only be picked up by himself
or his assistant, Mary Bad. Of the five fraudulent acts, two were
committed by Smith and three additional purchases were made
by Bad. Ms. Bad had used the purchase card assigned to Bob
Smith to make these additional purchases.
After reviewing the records of the vendor, the investigator
discovered five additional purchases that were made by Smith
or his assistant before August of 2007. Mr. Jones provided the
investigator with copies of the five invoices which contained
purchases for a notebook computer, a digital camera, a digital
camcorder, a GPS system, and a home theater system. The
investigator took the invoices and matched them to the physical
assets database and discovered there were only copies of the
purchases and no original copy or assigned ID number. All of
the purchases were purchased with Smith purchasing card and
approved by the purchasing agent. Mr. Smith and Ms. Bad were
fired.
The scheme involved the two employees creating false
invoices that appeared to be for company purchases but where

4. in fact for personal items for the two offenders. The company
purchases were designed to cover up the misappropriation of
company assets. Smith and Bad worked together to cover up
their fraudulent scheme and used company equipment to commit
the frauds. They manipulated the invoices and the information
being entered into the physical assets database.
Asset misappropriation makes up about eight out of ten of
the occupational frauds that occur in organizations (Coenen,
2008). Most asset misappropriations are fairly straightforward
and can be recognized by accountants with proper training.
According to the Association of Certified Fraud Examiners,
more than 91% of all internal fraud schemes involved an asset
misappropriation element, and the median loss from an asset
misappropriation was $150,000 (Coenen, 2008). This crime is
defined as a white collar crime and is extremely common in
companies and organizations.
The investigation determined that $8,795.60 in false
invoices had been submitted for reimbursement through the
purchasing department. The offenders should be punished for
their crimes and face criminal consequences. The two criminal
offenders should be charged with fraud and the attempt to
commit fraud. The large dollar amount of the crime would make
it a felony and under federal statutes the offenders would face
six to ten years for their first offense and eight to fourteen years
for the second offense (Berman, 2010).
The company, Lakes Inc, should make an example of the two
employees that committed asset misappropriation acts against
the company. These acts cause great financial harm to the
company and affect the attitude of the organization. Bob Smith
used his position of authority in the company to commit acts of
fraud and encouraged an employee to engage in these acts with
him. The company should have a better system of controls and
develop better predictive measures for stopping acts of theft.
Employees should be trained to recognize acts of fraud and to
report these acts to the company. By reporting and pressing
charges against the purchasing agent and his assistance, the

5. company has shown current and future employees they will not
tolerate act of theft.
References
Berman, D. (2010). Sentencing Law and Policy. Retrieved
October 24, 2010 from
http://sentencing.typepad.com/sentencing_law_and_policy/feder
al_sentencing_guidelines/
Coenen, T. (2008). Asset Misappropriation. Retrieved October
24, 2010 from
http://www.fraudessentials.com/index.php?option=com_content
Wells, J. (2001). Enemies Within: Asset Misappropriation
Comes in Many Forms. (The Fraud
Beat). Journal of Accountancy. P. 2-5. Retrieved October
24, 2010 from
http://www.allbusiness.com/human-resources/workplace-health-
safety/828482-1.html