ACCT 2212 Forensic Business Investigation Comprehensive Study Guide (Recommended for Good Grades)

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1.Fraud Committed by Sonya Causer 1.1 Fraud Triangle There are three key elements must be concurrently present in order for a person to engage in fraud: Perceived Pressure, Perceived Opportunity an ... d Rationalisation. (Albrecht/Albrecht/Albrecht/Zimbelman, 2016) 1.1.1 Perceived Pressure Sonya Causer was under the financial pressure of providing for the lifelong expenses of her two autistic children and to fund her obsessions from online trading which started off from teddy bears and escalating into property trading (Butler, 2010). The various life circumstances of Causer being pressured into escaping reality by seeking an alternative lifestyle. The factors include her two autistic children who require costly lifelong intensive medical care and supervision, an ailing marriage with her cannabis addicted husband who quit his previous job to look after the children and lastly, her lack of any social interactions. This can be observed with Causer stating that she derived joy not from the properties but rather from negotiations and dealings with people for the properties. Her obsession with trading and delusions of herself being a “property wizard” can be seen as a sign of escapade by Causer from her otherwise mundane lifestyle (Winterford 2010, Butler 2010 & R v Causer 2010). 1.1.2 Perceived Opportunities There was a lack of internal controls in Clive Peeters’s accounting procedures such as lack of segregation of duties and a faulty system of authorisation gave birth to ample opportunities for fraud to occur. This is clearly shown in Causer’s case whereby she was given full control over the company’s payroll system upon her promotion with no need for a second individual to countersign or approve of changes and payments made to the accounts by Causer. Causer was able to freely change Clive Peeters’s clients account numbers to forward payments to herself (R v Causer 2010, Carson and Battersby 2009). With the lack of proper procedures in place and roles with conflicting interests under Causer’s sole charge, she was able to misappropriate the company’s assets by changing account details to those under her control when payments are approved to fund her personal activities such as the purchase of real estates and luxury goods out of her means while easily concealing her tracks (Berglund, 2017). If there was a second individual required for changes and payments made or if there was a clear segregation of duties, the fraud mentioned would have been harder to come to fruition. 1.1.3 Rationalisation In our opinion, there is only inkling of Causer’s thought process which was close to rationalisation is to provide for her children lifelong medical expenses which were costly. For Causer’s case, she largely operated under the delusion that she was a “property wizard” but did it mainly for the social interactions through negotiations and dealings with the other parties, which was her only source of joy in life. We think that logical thinking cannot be applied for Causer’s case as she had been diagnosed with delusional disorder by professional psychologist, Mr. Jeffery Cummins, therefore the lack of solid evidence for rationalisation by Causer (Butler, 2010 & R v Causer, 2010). 1.2 The Fraud Scale The severe lack of controls in Clive Peteers’s accounting systems played a huge role for the fraud to come to fruition. Even if Causer was not the perpetrator, anyone else in her position with low personal integrity would have and could have easily committed the fraud similarly, if not on a much higher scale. Additionally, the high pressures Causer faced from her less than desirable situation and the unstable mental state that she was in played a large role in causing Causer to act out the fraud. Causer had demonstrated low personal integrity by abusing the loophole she discovered in the company’s internal controls on numerous occasions, to fuel her obsession of property trading. Should Causer have had high personal integrity instead, what she would have done would be to report to higher management of the loopholes discovered, to prevent possible damages from fruition. Based on the fraud scale, with many opportunities, high pressure and possible low integrity, Causer’s chances to commit fraud is very high. (Appendix 1) 2. Falsification of Accounts First Element: Causer was first employed by Clive Peeters at their head office as a Senior Financial Officer around March 2006. Shortly after, Causer was promoted and her duties expanded and was given full charge over the company’s payroll system. The level of authority given to Causer even allowed her to change payee’s account details on a whim (Berglund, 2017). Second and Third Element: Causer had acted out her whims on many occasions without concerns about the consequences that her actions might bring about and siphoned Clive Peeters’s assets to fund her activities. Causer had accomplished the fraud by exercising her authority over Clive Peeters’s payroll system while exploiting the loophole that she found in company’s internet banking system. This was done with the intention to defraud her employer in order to fund her “property guru” persona. (R v Causer, 2010). Fourth Element: Causer substituted the client’s account number to an account under her charge whenever the payment was approved for her fraudulent acts. The account details were then swapped back to the original account when the funds were transferred (R v Causer, 2010). Fifth Element: As Causer had full control over the payroll process, she was able to conceal her tracks easily by manipulating Clive Peeters’s “online banking records, the general ledger and management reporting”. Overall, Causer misappropriated $19.365 million through 90 withdrawals involving 125 payments made to 8 accounts under her control (Berglund, 2017). Sixth Element: Causer had funneled the funds from Clive Peeters’s accounts into those which were under her name, through means of altering clients’ account details after approval was given for payments to be made. (Appendix 2) 3. Collapse of Clive Peeters Clive Peeters’s collapse was not entirely due to Causer’s fraudulent act as there were other factors occurring throughout the years which contributed to the fall. However, the fraudulent act started a snowballing effect which caused the downfall of Clive Peeters. Reducing Cost to Remain Profitable Before Causer’s fraud was discovered, Clive Peeters went on a cost-cutting spree such as retrenchment and forced redundancies, aborting staff parties and reducing inventory, in a bid to curb their cash flow issues. Clive Peeters’s reduction of inventories by close to $24million meant that the company received less discounts on their purchases. A higher purchase price meant increased retail prices to remain profitable. Therefore, Clive Peeters lost their competitiveness in the industry the moment they were unable to purchase enough goods to earn the rebates from manufacturers and importers (Battersby and Mcilwraith, 2009). Poor Financial Planning Clive Peeters aggressively expanded during 2008 which resulted in net debt increasing to almost $30million, this was despite the knowledge that they were facing serious cash flow issues and were having troubles repaying debt. With a substantial increase in debt, it would mean an equally large increase in interest expense which is illogical in face of serious cash flow issues (Annual Report 2008, Page 21). Stiff Competition within the Industry Even though both Clive Peeters and Harvey Norman are both local companies, Clive Peeters only operates in Australia whereas Harvey Norman is an international company. Therefore, Clive Peeters is disadvantaged in terms of financing capabilities as compared to Harvey Norman. Clive Peeters is not able to greatly differentiate themselves from Harvey Norman as they are neither a niche business nor do they provide extra value-added services. Thereby, as soon as selling price increases, consumers would have no qualms in flocking over to Harvey Norman who provides identical services (Thomas, 2010). Failure to Raise Capital through Share Issuance KPMG suggested for Clive Peeter to raise working capital through issuing shares but the investors decided to withdraw at the last moment (McIlwraith, 2010). This could be due to the interested investors losing their confidence in Clive Peeters managements’ capabilities due to the huge scandal. Due to failure of injecting working capital into the company, Clive Peeters’s dire financial situation took a turn for the worst when they started to become unable to even generate enough profits to pay of interest expenses (Anubisengraving, 2017 & Annual Report 2009, Page 8-10). In conclusion, while Causer did commit substantial fraud, she might not have been the only one within Clive Peeters to have committed fraud. This can be seen with the contribution margin increase from 26.36% in FY 2007 to 26.38% in FY 2008, during a period of severe cash flow issues which led to decreased discounts from suppliers with lowered purchases. This may be indicative of management fraud, as Causer only had access to the payroll systems. An assumption would be that the Management were seeking private investments for capital injections to alleviate cash flow issues and required healthier financial figures to gain a higher bargaining ground. Also, due to Management fraud occurring simultaneously, Management may overlook cash flow issues resulting from Causer’s fraud and assume it as having resulted from their own Management fraud. Hence, it may have been the collective fraud which ultimately caused Clive Peeters’s collapse. Calculation for Additional Sales Scenario 1: The amount of loss of $4,815,000 arises from the loss on sale of properties and assets of $3,000,000 and misappropriation expenses of $1,815,000 which included transaction, legal and other costs. Thus, the additional sales needed to recover the loss of $4,815,000 will be $218,863,636.40. (Annual Report 2009, Page 17 & 52) Scenario 2: If Clive Peeters is unable to recover any losses from the fraud, they are required to generate additional sales of $880,262,181.80 in order to cover the amount stolen by Causer. 4. Analytical Method 4.1 Horizontal Analysis 4.1.1 Financial Year 2008 ● Income Statement Revenue from Sale of Goods, Gross Profit and Other Income have increased by 16.98%, 17.07% and 266.67% respectively. These numbers are reflective of Clive Peeters business expansion plans. Management should have investigated the causes for decrease of 24.07% in Profit for the Period, which was due to Sales, General and Administrative expenses haven risen by 23.12%, over 35% more than the increase in Gross Profit. Hence, the overall expense should be broken down into individual accounts for investigation. Investigations would have led the Management to the sharp increase in the payroll systems which Causer was given charge of and Causer’s schemes would have been uncovered. The account with material changes are Occupancy, Administration, Finance costs, Sales and Marketing. Of which, the increase in Finance and Occupancy can be linked back to Clive Peeters obtaining huge loans for expansions, which would naturally result in greater costs for these areas. However, should Clive Peeters have paid closer attention to the increase in Administration and Sales and Marketing expenses, which would have allowed for management to notice substantial expenses which resulted from Causer’s fraudulent actions. (Appendix 3) ● Balance Sheet The expansion of business and loan financing led to an increase of 52.36% and 32.84% in cash and cash equivalent and inventories respectively. There is an increase of 99.77% in other current assets due to an increase in the account of prepayments and GST receivable (Annual Report 2008, Page 63). Due to the expansion of business, trade and other payables have increased by 41.86%. There is an increase of $3.871 million in trade creditors and payroll related accounts as part of Causer’s fraud (Annual Report 2009, Page 84). Non-Current Liabilities increased by 9661.69%, or from $308,000 to $30,066,000 in part due to business expansions and lack of op [Show More]

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