Fraud Analysis

Case 1

One of the first signs that fraud could have been occurring was having one of the founders take the positions of controller and treasurer. No company should have one individual be responsible for handling the money and recording it in the books. This right here allows for the numbers to be manipulated.

Another sign of possible fraud would be the relationship that the city/bank had with the company. The city provided this company a building and the bank gave an attractive credit arrangement. In return of this the president of the bank was appointed to serve on the board of directors. This is an example of one hand washing the other.

Those on the board were paid not only an annual retainer but also for each meeting attended during the year. This could raise the question as to whether anything was actually being accomplished at these meetings or were they simply being held in order for the board members to collect their checks.

One final flag that this company raised was the fact that essentially the three founders had completely control of the company. They had worked together before and had personal relationships with each other. When they formed this company the essentially had all the same with each of them being in charge of operations, the financials, President and CEO. Without having to report to anyone these three really could have just ran the company as they saw fit apparently they did by overstating income and gross margin.

Case 2

1.) I’m not sure whether or not a good system of internal controls could have prevented fraudulent backdating. To me the whole concept of having stock options is a way for fraud to occur. I really do not think that it is right or ethical that CEO’is a way for fraud to occur. I really do not think that it is right or ethical that CEO'in charge of operations, the financials,s and high level employees and executives of a company are given the rights to stock options when they are employed by the firm, collecting a...