I.
Title: Conducting a Fraud Investigation
II.
Introduction
The AICPA Pre-certification Core Competency Framework provides detailed
explanations of the following:
Project Competencies:
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Risk assessment, analysis, and management
o Assess, analyze, and manage risk using appropriate frameworks,
professional judgment and skepticism for effective business
management.
Reporting
o Identify the appropriate content and communicate clearly and
objectively to the intended audience the work performed and the
results as governed by professional standards, required by law or
dictated by the business environment.
Governance perspective
o Understand the legal and regulatory environments affecting an
organization and their effects on an organization’s operations, internal
controls, and enterprise risk management. Recognize an
organization’s social and environmental responsibilities.
Professional behavior
o Practice in a manner that is consistent with the character and high
standards set by the AICPA and the accounting profession.
Demonstrate a work ethic and respect for diversity, as well as a
commitment to continuously acquire new personal and professional
skills and knowledge.
Decision making
o Objectively identify and critically assess issues and use professional
judgment to develop appropriate decision models, identify and analyze
the costs and benefits of alternative courses of action and recommend
optimal solutions.
Since graduating from your Masters of Accounting degree program, you have been
working as a second-year senior fraud examiner for the prestigious accounting firm
of HLR, Inc. The principals Honer, Levin, and Reich are CPAs and Certified Fraud
Examiners. They have worked in the industry since 1999 and are well known for the
high-profile cases they have brought to justice.
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You attended the weekly Monday morning meeting led by one of the three
principals; this week Honer led the meeting. He announced the annual conference of
the Association of Certified Fraud Examiners (ACFE) was scheduled for next year in
Austin, TX. Further, the ACFE conference planning team contacted HLR, Inc. asking
if the company had any interest in providing guest speakers for the conference.
Absolutely, said Honer. He committed to providing the conference with guest
speakers for the concurrent sessions and a report for conference attendees to gain a
better understanding of the most comprehensive fraud case the firm has
encountered in recent years. For confidentiality and privacy issues, Honer explains
he will select the case at the end of the year and one that has already gone to trial
and been adjudicated.
Eager to advance your career, you ask to be assigned to high-profile fraud cases in
hopes that one will be selected for presentation at ACFE’s next annual conference.
III. Steps to Completion
Step 1: Read the case study file in the Project 1 folder: AIM Corporation: A Business
Fraud Case Study.
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Note the following changes to the “Case Requirements” on page A44 in the case
study file:
1) In Task 1: instead of referencing the Fraud Examination textbook by W.
Albrecht, C. O. Albrecht, C. Albrecht, and Zimbelman, you may use the ACFE
Fraud Examiners Manual located in LEO/Content/Learning Resources/Books &
Other Learning Resources
2) All references to a “memo” should be converted to a report in APA Style.
3) In addition to the six (6) Tasks listed in the “Case Requirements” you are
required to prepare and present a 10-15 minute presentation. Thus, there are
seven (7) Tasks (or Steps) for this graduate course.
IV. Deliverables
1. MS Word Report in APA Style, 7ed.
a. If you are unsure of APA Style, this sample paper may be helpful. Also,
APAStyle.APA.org provides a plethora of resources to learn APA.
b. The approximate length of your report will be 15-18 pages assuming you
used APA Style. The title page, reference list, and any appendices may
extend the report beyond 18 pages. The body of the report must be no
less than 15 pages in APA Style.
2. PowerPoint Presentation
A 10–15-minute presentation. There are two presentation options, at your
professor’s discretion.
Option 1: An audio-enhanced PowerPoint presentation with accurate
transcriptions (or accurate Closed Captioning) suitable to present to your boss
and colleagues. The audio enhancement must be embedded and run without
requiring your professor to click the “Play” button on each slide. When you click
“Play from Start” on slide 1, the slides advance automatically, the closed
captioning is shown below each slide, there are no background distractions, and
the presenter speaks clearly at a reasonable pace.
Option 2: At your professor’s discretion, you may schedule a live Zoom
presentation to your professor and classmates. This option omits the
requirement to add audio to your PowerPoint presentation file. It also provides
you with an opportunity to practice your public speaking skills in a safe
environment and receive confidential constructive feedback from your
classmates that your professor will not see.
V. Rubric
The rubric for every project is located in the Project folder.
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VI. Helpful hints:
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Read the rubric before you begin writing to ensure you understand the
requirements.
Ask your boss (professor) questions as needed.
Review and refresh your understanding of the 7th ed. APA Style formatting.
Review Turnitin resources in Content/Course Resources/Writing Resources
Submit your final project to Turnitin (TII) before the due date to receive a
Similarity Score.
o If you determine the Similarity Score is too high, edit your paper (usually
by adding more citations and/or quotations marks) and resubmit to TII.
Your professor will grade the last version submitted before the due date.
Re-read the grading rubric before submitting your final project to ensure you
have met all of the requirements of this project and have uploaded all deliverable
files.
Submit your draft documents to the writing tutors at least 1 week before the
project due date. Make edits to your deliverables after reviewing feedback from
the writing tutors.
If relevant, review the Late Policy, located in Learning Resources/Late Policy.
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Last updated by Sharon L. Levin
JOURNAL OF FORENSIC ACCOUNTING RESEARCH
Vol. 3, No. 1
2018
pp. A37–A51
American Accounting Association
DOI: 10.2308/jfar-52124
AIM Corporation: A Business Fraud Case
Study
Thomas R. Weirich
Central Michigan University
Natalie Tatiana Churyk
Northern Illinois University
ABSTRACT: The Association of Certified Fraud Examiners (2016) indicates that asset
misappropriation is the most common form of occupational fraud. Based upon a real
company, this case contains six frauds: collusions, commissions, fictitious sales, rebates,
refunds, and write-offs. It also includes several asset misappropriation (e.g., theft of cash,
misuse of inventory, and fraudulent reimbursement) schemes. Furthermore, four of the
six frauds are not found in other published case studies. The case seeks to enhance
learning by having students (1) examine multiple fraudulent schemes within a single
company, (2) identify frauds after examining firm procedures and documents, (3) suggest
applicable fraud protection procedures, (4) identify internal control weaknesses, and (5)
apply the fraud triangle. Undergraduate and graduate students from two universities
performed well on the case.
Keywords: fraud; fraudulent schemes; investigation procedures.
CASE
Introduction
C
ommercial Products, Inc., an international home and builder hardware supplier, is in the
initial stages of acquiring AIM Corporation (AIM), a U.S.-based company that designs and
manufactures various tools and related accessories. At Commercial Products’ request,
you, as a CPA firm employee, are asked to perform a due diligence investigation to determine
whether the financial information and asset valuations appear reasonable. This information will
help Commercial Products establish a purchase price.
We thank Barbara Apostolou (West Virginia University), Alan Reinstein (Wayne State University), and Brian Patrick
Green (University of Michigan–Dearborn) for comments on earlier drafts of this manuscript.
Editor’s note: Accepted by Charles D. Bailey.
Submitted: October 2016
Accepted: March 2018
Published Online: April 2018
A37
Weirich and Churyk
A38
During your due diligence investigation, you receive an anonymous, brief phone call on your
firm’s whistle-blower hotline regarding a potential fraud occurring within AIM’s operations. After
discussions with Commercial Products and AIM, you and your firm’s forensic accounting division
will accept an additional engagement to determine whether fraud has occurred and who the
perpetrators might be.
To begin the forensic accounting engagement, the partner asked you to gather background
information about the company. From an internet search and discussion with AIM’s management,
you reported the following company and market information to the engagement partner.
Company Background
AIM Corporation, headquartered in Stockton, California, began operations in 2005 and
designs, manufactures, and sells hardware, tools, and related accessories for the construction
and remodeling industry. From interviews, you gathered that AIM’s president, James Risen, is an
aggressive, growth-driven individual who has a corporate motto for all employees, ‘‘AIM High,’’
as reflected in the company’s logo. AIM’s product line includes many types of power tools that fall
into six primary product groups: (1) electric drills, (2) saws, (3) sanders, (4) grinders, (5) routers,
and (6) planers. AIM manufactures about 25 percent of its product line in two facilities located in
Stockton, California, and Tucson, Arizona. Foreign or domestic independent contractors
manufacture the remaining 75 percent. AIM also manufactures and sells related tool accessories
such as blades, sandpaper, drill bits, carrying cases, and cutting tools for the routers and
planers. Sales of these accessories account for approximately 12 to 15 percent of annual
revenue.
To remain competitive, AIM introduces new products, accessories, or product modifications at
annual trade shows in the various sales regions. Several times a year, employees from
headquarters, manufacturing, distribution, and sales offices meet at the Stockton headquarters for
a weekend briefing on the new products. During the most recent meeting, the president relocated
two sales personnel to different regions to provide a more even distribution of seasoned/
experienced sales staff. One individual was relocated from the Northwest region to the Southwest
region, and one from the Southwest region to the Northeast region. Relocated sales personnel are
no longer involved with prior customers, and are to work only with customers in their new region.
Neither salesperson was happy about the move, which required them to develop new customer
relationships in order to obtain their standard 3 percent commission. Both were overheard
complaining to James Allison, the corporate credit manager, about the relocation.
Market
While AIM is the market leader in the power tool industry, with about $3 billion in annual sales,
the market for AIM’s products is unpredictable because of fluctuations in the economy. For
example, housing starts in the construction industry create demand for tools and accessories. AIM
sells its products to thousands of hardware stores, but 60 percent of its sales are to the 12 largest
retailers and discount stores that negotiate extremely competitive prices.
Although AIM’s primary markets are in the western states (55 percent of its sales are from the
Northwest and Southwest regions), it divided the country into five sales regions (see Table 1 for list
of states and sales representatives in each region): (1) Northeast, (2) Southeast, (3) Central, (4)
Northwest, and (5) Southwest. Distribution centers are located in Tucson, Chicago, and Dallas.
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2018
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TABLE 1
States and Sales Representatives by Region After Relocations
Region
Northeast
Southeast
Central
Northwest
Southwest
Sales
Representatives
States and Territories
(Including DC)
Frank Adams
Donald Wright
Erin McVay
Russ Schafer
Joey Sdauk
Art Sweeny
Mike Zemba
Phil McQuaid
Matt Parks
Al Schick
Craig Swann
Ed Jones
Brian Megu
Pat Scott
John Teed
Bill Wikston
Julia Wiser
Ed Wold
Gary Schutt
Pete Johnson
Matt Marshall
Joyce Wolfe
Sally Woodward
CT, DC, DE, MA, MD, ME, NH, NJ, NY,
PA, RI, VT
AL, AR, FL, GA, KY, LA, NC, MS, PR,
SC, TN, VA, WV
IA, IL, IN, KS, ND, NE, OH, OK, MI,
MN, MO, SD, WI
ID, MT, OR, WA, WY
AK, AZ, CA, CO, HI, NM, NV, TX, UT
To obtain operations information, you decided to interview the operations manager and
controller. Based on discussions, the following information was gathered.
Operations
AIM’s business operations are typical in its industry. Corporate accounting is centralized and
each manufacturing facility is electronically connected through Electronic Data Interchange (EDI)
to corporate headquarters. At the end of each day, manufacturing and sales activities are
electronically transferred to headquarters. Table 2 contains a partial list of customers, customer
addresses, dates of first sales order, and account balances as of the date of your investigation.
The last column indicates the change in sales to these customers over the prior year.
As mentioned previously, your CPA firm recently received an anonymous tip. The caller said
that certain segments of the overall operations are causing concern as rebates and billing
adjustments appear unreasonable. This tip was further discussed with AIM’s internal auditor who
also was perplexed by this issue. Thus, Commercial Products, in discussion with AIM
management, has requested your forensics accounting division to investigate the possibility of
fraud. The specific focus of the investigation centers on the operations described below.
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TABLE 2
Customer Data
Demo Accounts/Kits and Stock Transfers
AIM has a large sales force that calls on customers throughout the U.S. Within each sales
region, the sales manager establishes a ‘‘demo tools’’ account for each salesperson, allowing each
salesperson to obtain tools from a distribution center to use as demos when calling on current and
potential customers. Corporate headquarters maintains a demo log, which it periodically reconciles
to the tools in the salesperson’s demo account.
When the demo products have served their use or another salesperson needs them for
demonstration purposes, the salesperson can sell the products as ‘‘used,’’ return them to AIM for
reconditioning and resale, or transfer them to another salesperson. If a product is sold as ‘‘used,’’
or transferred to another salesperson, a Billing Adjustment Form (BAF) is created to record the
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sale/transfer. The BAF results in the generation of a credit memo for the original salesperson’s
demo account and a debit memo to the customer or second salesperson. Likewise, a salesperson
can complete a BAF for demo products that are, for example, returned to the distribution center
when a new product modification occurs or the salesperson returns the old product for the new one
to be placed into the demo kit.
A regional sales manager could also process a BAF to transfer products among a region’s
customers, such as when one customer needs a distribution center’s out-of-stock product. The
sales manager checks for a customer that has the needed product and is willing to receive a sales
credit, then transfers the product to the customer that needs the item. The customer receiving the
product receives a debit memo and the customer giving the product receives a credit. Credits can
remain in the customer’s account or the customer can request a refund. While past history reveals
that most customers prefer credits for future purchases, certain customers have chosen to obtain
large refunds for their accumulated credits. When customers request a refund, the salesperson
who sold the product creates the check request for the sales manager of the appropriate region to
sign. The check request is then sent to corporate headquarters for James Allison’s approval.
Figure 1 shows the check requests for refunds, which reference the invoice(s) involved.
At corporate headquarters, James Allison authorizes the regional sales managers’ BAFs, and
can authorize bad debt write-offs. Table 3 shows several actual BAFs. As previously mentioned,
authorized BAFs and write-offs are sent to corporate accounting, which records the transaction
and issues a check if requested. For those BAFs that do not have customer names, the
salesperson should return the demo products to AIM.
Order Processing
Corporate headquarters’ Customer Service Department via EDI receives and logs in orders
and sends them to one of three distribution centers for filling and bill-of-lading generation. Both
documents, the order and bill-of-lading, are sent to the Trafficking Department for matching,
routing, and creation of shipping labels. The labels and documentation are sent to the Shipping/
Packaging Department.
Since shipment amounts are reported to major truck carriers as ‘‘shipper loading counts
reports,’’ the carrier normally does not count the order before it takes the products for shipment.
The shipping department is responsible for accurate counting. Trailers are normally dropped off
one day for loading and picked up the next day for delivery. When shipments are loaded, a copy of
the order and the bill-of-lading is sent to the Billing Department to generate invoices for James
Allison to review before they are issued to customers.
Customers that change their minds about a product, receive an incorrect product, or receive
an incorrect quantity are to contact their salesperson to request an adjustment. The merchandise
is either returned to the distribution center or, if possible, sold to another customer without
returning to the distribution center. In either case, the salesperson creates a BAF crediting the
original customer’s account and debiting the new purchaser’s account or inventory. Table 4
contains BAFs for several customer returns.
Miscellaneous
While AIM is the market leader, sales were slow the first half of the current year due to
declining new housing starts. To increase sales revenue, AIM’s six-month promotional campaign
had regional salespeople notify customers of a 2 percent cash rebate on all new purchases.
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FIGURE 1
Check Requests
Panel A: Check Requests #1–#4
(continued on next page)
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FIGURE 1 (continued)
Panel B: Check Requests #5–#8
(continued on next page)
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FIGURE 1 (continued)
Panel C: Check Requests #9 and #10
CASE REQUIREMENTS
As a second-year senior at the CPA firm, you already had some familiarity with AIM from your
due diligence work preceding the anonymous tip and the internal auditor’s concerns about AIM’s
operations and from the background information you gathered for the engagement partner. The
engagement partner has asked you to assist the forensic accounting division’s investigation.
Prepare a memo to your forensic team manager addressing each of the following tasks.
Task 1: Read the case and examine the tables and Figure 1 carefully. During your reading,
highlight any concerns or possible issues (red flags). List all concerns and issues in your
memo to your forensic team manager. Note: Suggested resources for examples of red
flags include AICPA’s Statement on Auditing Standards No. 99, Consideration of Fraud in
a Financial Statement Audit, and fraud examination books such as Fraud Examination,
Cengage Learning, 5th ed. (W. Albrecht, C. O. Albrecht, C. Albrecht, and Zimbelman
2016).
Task 2: Evaluate whether the possible issues (red flags) identified in Task 1 are indicative of
fraud. Mark these clearly on the list in the memo prepared in Task 1. Choose any two of
these potential frauds. For each of these two potential frauds, draw a basic flowchart
showing what should happen and what actually happens. Be sure to include an
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TABLE 3
Billing Adjustments—Demo Accounts
accompanying narrative to explain the fraud. Flowcharts can be handwritten or computergenerated.
Task 3: Describe the three elements of the fraud triangle. Categorize each potential issue
(red flag) identified in Task 2 under the corresponding element of the fraud triangle.
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TABLE 4
Billing Adjustments for Return and Transfers
Task 4: For each of the potential fraud issues marked on the list in Task 2, provide detailed
instructions for investigation techniques that could be used to verify whether a fraudulent
activity is taking place. Include factors that might limit the team’s ability to gather evidence
for the investigation.
Task 5: Based on the evidence given in the case, Tables 1, 2, 3, and 4 and Figure 1, identify
and explain any internal control weaknesses. In a new section of the memo to the forensic
team manager, provide detailed suggestions for controls that may mitigate the
weaknesses that you have identified.
Task 6: Conclude your memo to the forensic team manager with a list of recommendations to
mitigate or prevent further frauds in the organization.
REFERENCES
Albrecht, W. S., C. O. Albrecht, C. C. Albrecht, and M. Zimbelman. 2016. Fraud Examination. 5th edition. Mason, OH:
Cengage Learning.
Association of Certified Fraud Examiners (ACFE). 2016. Report to the Nation on Occupational Fraud and Abuse. 2016
Global Fraud Study. Austin, TX: ACFE.
Journal of Forensic Accounting Research
2018

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