Do you have to be Good at Accounting to Embezzle $16.6 M from a Small Business?

A fruitcake company, the Collin Street Bakery, in Texas just found out the answer to this question! The company’s controller, Sandy Jenkins, 64, of Corsicana, Texas, was arrested by special agents of the FBI on a federal criminal complaint charging 10 counts mail fraud and allegations that he wrote 888 checks totaling $16.65 million to his personal creditors.

Questions:
1. Over the 8-year period of the fraud, what amount does that average out to be per check?
2. According to Sharon Sutila, what are the common embezzlement schemes in small business?
3. How did Mr. Jenkins accomplish his fraud? How would this involve accounting skills? Discuss.
4. What controls would have prevented this?
5. What were some of the red flags of fraud presented in the articles regarding this case? full_9795

Sources:

Sutila, S. (2013). Would you Notice $16.6 Million Missing? The Informant, September 30 (Retrievable online at http://clusopi.com/embezzler-accused-stealing-millions-criminal/)

TexasBusiness.com staff (2013). Former Texas Fruit Cake Bakery Executive Accused of Stealing $16.6 Million. Texas Business, August 15 (Retrievable online at http://texasbusiness.bondwaresite.com/former-texas-fruit-cake-bakery-executive-accused-of-stealing-16-6-million-cms-9795)

Does Embezzlement Pay?

Bradley Whitsell, chief accountant of SDN Communications in Sioux Falls, SD, pleaded guilty to mail fraud on Monday, August 22.  According to the U.S. Attorney’s office 46-year-old Whitsell used his various oversight positions to embezzle more than $392,000 over a 10 year period beginning in 2000. Whitsell could end up in prison for up to 20 years. Whitsell has agreed to pay back the $392,111.65 and will also pay for the $84,000 cost of the audit that uncovered his theft.

Questions:

1.  According to the article, what specific problems with internal controls allowed Whitsell to commit this fraud?  Also, discuss the fraud triangle as it pertains to the case in your answer.

2. Look up the most recent 2010 Report to the Nation at the Association of Fraud Examiners website.  Was the length of Mr. Whitsell’s fraud longer, shorter or about the same of the average fraud in terms of months before getting caught?  Explain.

3.  Compared to the average fraud committed by a man this age, as reported in the 2010 Report to the nation, did Mr. Whitsell steal more, less, or about the same amount of money? How does this compare to the average amount stolen by a women of the same age?  What is typically the key difference between these amounts?

Source:

Gonzalez, A. (2011). Embezzling Accountant Will Pay Back Stolen Money and Pay for Audit That Caught Him. Going Concern, August 23 (Retrievable online at http://goingconcern.com/2011/08/embezzling-accountant-will-pay-back-stolen-money-and-pay-for-the-audit-that-caught-him/ )

Star Power Fraud

Kenneth Starr, a celebrity financial adviser to stars including actors Wesley Snipes and Sly Stallone, was charged with carrying out a massive $30 million fraud on his clients and then spending the money on a luxury apartment and jewelry, federal prosecutors said. Starr, head of the Manhattan-based Starr and Co., was charged with wire fraud, fraud by an investment advisor, money laundering, making false statements to the IRS and lying to federal agents. On September 13, he pleaded guilty to three counts of wire fraud, money laundering, and adviser fraud as part of a $50 million fraud and faces 20 additional counts and charges by the SEC.

Questions:

1. In general, how did Starr perpetrate this fraud? 

2. What “red flags” should have been recognized by alert investors?

3. Read the criminal complaint at http://www.nypost.com/r/nypost/2010/05/27/news/media/Starr,%20Kenneth%20and%20Stein,%20Andrew%20Complaint.pdf. Based on the complaint and the articles, can you figure out who any of the personalities are in terms of their specific-numbers as Associates or Clients? What purpose did the Wind River LLC account serve and how much money went through this account? Why are the amounts in the complaint and the pleading different?

4. Based on the criminal complain, how long did this fraud last and how does that compare with the average length of time for most similar types of schemes? (Hint: Go to the Association for Certified Fraud Examiners website to obtain the average length.) What types of charges (20 additional charges) do you think he faces with the SEC?

Sources:

Barney, L. (2010). ‘Mini Madoff’ Starr Pleads Guilty to $50 Million Fraud, OnWallStreet.com, September 13 (Retrievable at http://www.onwallstreet.com/news/starr-madoff-2668709-1.html)  

Southern District of New York, (2010). The U.S. versus Kenneth Starr and Andrew Stein (18 U.S.C. 1001, 1343 & 1956; 15 U.S.C. 80b-6 & 80b-17; 26 U.S.C. 7206 (1), May 26 (Retrievable at http://www.nypost.com/r/nypost/2010/05/27/news/media/Starr,%20Kenneth%20and%20Stein,%20Andrew%20Complaint.pdf)

Weiss, M.,  L. Cartwright, and B. Golding. (2010) Manhattan Financial Adviser to Celebs is Charged with Scamming Clients, New York Post, May 28 (Retrievable at http://www.nypost.com/p/news/local/nyc_financial_adviser_to_celebrities_DXslLxEwDlkAkxcooYs4pN#ixzz0zET4uSO5)

Church Robbed of $600,000 Online

Over one weekend in August 2010, the Catholic Diocese of Des Moines, Iowa, fell victim to a $600,000 ACH fraud theft, thus, becoming another in the growing list of businesses and entities that have suffered huge losses as a result of these frauds.

Questions:

1. Based on the article, what do you calculate as the average estimate per incident of these recent crimes?  How does the church crime compare?

2. What does ACH stand for? What type of litigation do you anticipate might arise from this incident?

3. Investigate the other victims of the corporate account take-overs mentioned in the article. What type of internal controls do you think were violated in order to perpetrate these frauds?  

Opting for Electronic Transactions

More companies are cutting eliminating the acceptance of check payments from their business plans. According to Karen Aho, Whole Foods Markets, Fresh & Easy, and Banana Republic (a brand of Gap, Inc.) are just a few of the companies that refuse checks as payment from customers. According to the Federal Reserve, paying by check has declined by 6.4% since 2003. Financial services consultant, like James Neckopulos, believe that checks will be a thing of the past in 10 years.

QUESTIONS:

  1. The article talks about how “paper costs money.” What are these costs associated with taking checks and where would they be accounted for on the financial statements?
  2. Are there any costs associated with accepting credit card payments from customers? If so, how are these recorded in journal entries?
  3. While some companies cite faster check-out lanes as an advantage of no-check policies, what are the financial advantages of accepting only cash, credit cards, or debit cards? What are some of the disadvantages in terms of customer relations?
  4. Are payments by check reported separately on financial statements? If not, then where?

SOURCE:

Aho, K. (2009). Still Use Checks? Join the Dinosaurs. MSN.Money (Retrievable online at
http://articles.moneycentral.msn.com/Banking/BetterBanking/still-use-checks-join-the-dinosaurs.aspx)