Embezzlement and Fraud Detection

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Over the course of six fiscal years, top officials purposefully changed Accuhealth, Inc.'s financial statements. There are a few particular audit techniques that could have been applied to find the significant fraud. The company's journal entries are first tested. A company's financial records typically need to be adjusted in order to commit financial statement fraud. Journal testing would therefore aid in understanding the company's controls and practices and aid in the detection of fraud. In this case, the auditors could have selected large entries, entries made by upper management and store managers, entries made late in the accounting period, and suspicious entries. The embezzled cash was recorded on a weekly basis by store managers in the store cash report sheet. The journal entry labeled as office was updated on a weekly basis at only two stores and the headquarters which could have raised suspicion among auditors.

The auditors could also have detected fraud by examining the company’s accounting estimates. The subjective nature of accounting estimates makes it possible for the management to influence the estimates to manipulate the final financial statements. The lookback procedure, in this case, could have made the auditors determine whether there had been a change in the methodology of completing estimates over the recent past. The methodology could have changed due to the manipulation of the end- year inventory ranks which suggest manipulation.

The Control Environment

The control environment is the most critical component of internal control since it encompasses standards, processes, and structure that govern the organization in all situations. The attitudes of the management are a major factor in the control environment with factors such as integrity and ethical values, competence, management philosophy and operating style playing a critical role. The actions of the management shape the control environment. In the case of Accuhealth, Inc., the senior officials were the masterminds of the massive fraud. The CEO, Stanley Lepelstat, created the elaborate scheme which had been in action since the inception of the company. The fact that the operation was not concealed with envelopes of cash were delivered to their respective recipients during normal working hours is an illustration of the company’s control environment. The management of Accuhealth did not demonstrate integrity or ethical values which is one of the components of the control environment. This essentially made the control environment of the organization non- existent.

William Makadok’s Situation

A professional accountant should, on encountering suspected illegal activity, discuss it with the appropriate level of management. If I were in William’s position, I could have brought up the issue will the top management of the company. Their explanation could have guided the next step. An inadequate response could have prompted me to report the suspected fraud to the SEC for appropriate action. This is ethically right and could have absolved William Makadok of all blame in the scandal.

February 14, 2023

Corporations Finance

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