Fraud Fraud

The Anonymous Caller

Recognizing It's a Fraud and Evaluating What to Do[1]

Learning Objectives

• After completing and discussing this case you should be able to

• Appreciate real-world pressures for meeting financial expectations

• Distinguish financial statement fraud from aggressive accounting

• Identify alternative actions when confronted with suspected financial statement fraud

• Develop arguments to resist or prevent inappropriate accounting techniques

It was 9:30 A.M. on a Monday morning, one like a thousand others in the Naked City. I was sipping my cup of coffee, pondering Jake van der Kamp’s rant in the South China Morning Post when the call came through.

"Hi Dr. Westland, do you have a minute?"

"Sure," the professor replied.

"I am one of your former students, but if you don't mind, I would prefer to remain anonymous. I think it is best for both of us if I not reveal my name or company to you. I am concerned that the senior executives of the company where I serve as controller just provided our local bank fraudulently misstated financial statements. I need some fast advice about what to do. Currently, I am on my car phone and need help evaluating my next step before I head to my office this morning. May I briefly describe what's going on and get some input from you?" she asked.

"Go ahead, let me see if there is some way I can help," responded Dr. Westland.

"I am the controller of a small start-up company that I joined three and one-half months ago. On Friday of last week, the company's chief executive officer (CEO), the vice president of operations, and the chief financial officer (CFO) met with representatives of the bank that funds the company's line of credit. One of the purposes of the meeting was to provide our most recent quarterly financial statements. The company is experiencing a severe cash shortage, and the bank recently halted funding the line of credit until we could present...