Something's Fishy at Jones Company
By Martin J. Coe, MBA, ACFE Educator Associate, CPA, CISA; Jeffrey Coussens, MFA; and John Delaney, DBA, ACFE Educator Associate, CPA, CIA
Part II for CONT 5400 at UPR-RP
COLLINS REPORTS TO REYNOLDS
Collins was proud of his analysis; he told Reynolds the company should bring this machining operation in-house so the profit margin could improve. But Reynolds was cautious. She said it would be prudent for Collins to first find out the firm to which Jones Company had outsourced this machining operation before it used Smith Company; the previous vendor might have been cheaper. She also asked Collins to examine Smith Company's vendor file.
Collins discovered that the vendor Jones Company used before Smith Company charged 50 percent less than Smith Company for the same machining operation. He also found that Jones Company had paid Smith Company more than $2 million for outsourced machining the previous year. The vendor file contained all the necessary documentation to establish Smith Company as a valid vendor; however, Smith Company had been added as a vendor after CPI purchased Jones Company. After Reynolds reviewed this information, she told Collins to perform a public records search on Smith Company.
Collins found Smith Company's articles of incorporation. The articles listed Tony DeMarco as an officer of Smith Company. DeMarco is Jones Company's production manager and Reynolds recalled seeing in the audit paperwork that DeMarco had approved payment of invoices submitted by Smith Company. She knew immediately that the problem was worse than she'd originally thought, and fraud might be afoot. The next step was for her and Collins to interview DeMarco.
AUDITORS INTERVIEW PRIME SUSPECT
Collins had never interviewed a fraud suspect before, so Reynolds, who had interviewed several, gave him some pointers. Reynolds warned him they