This is a rather lengthy reading, read and answer questions at the end of the reading. Provide your answer in a essay form.
PLEASE READ THE FOLLOWING CASE AND RESPOND TO THE QUESTIONS AT THE END. THIS CASE CAN ALSO BE FOUND IN THE TEXT ON PAGES 218 – 221
Rich Skywark is the owner of Skywark Hardware and Electric, a family owned business, in the College Station, Pennsylvania, area. His business consists of over-the-counter retail sales and discounted sales of building materials to local contractors. Sales to contractors consist mostly of specialized lumber and electrical supplies that are not available through the area’s larger suppliers of building materials and electrical parts.
Most contractor customers have established accounts and place orders over the phone or the Web. However, contractors also visit the store to make purchases, sometimes purchasing on account and other times paying in cash. Retail customers pay only in cash.
Next to the front door is a long glass counter area with items that are sold from both inside the counter and the wall behind it. Two cash registers sit on the counter, and at least one of the two is open and in operation at all times during business hours.
Skywark’s bookkeeper is Mark Hansen, who works alone and maintains all accounting records, including accounts receivables and accounts payable. He also manages the checkbook, payroll, cash deposits to the bank, and all tax-related matters. He maintains all accounting records in Intuit QuickBooks®, the well-known computerized accounting system that is popular among small and medium-size businesses.
Rich was happy he had hired Mark the year before because before Mark, he had had a string of successive bookkeepers who each worked for a few months and then quit. In recent months, Mark had become moody and difficult to work with. Whenever Rich asked him a question about something, Mark would become irritated.
“I know how to do my j ob,” Mark would say.
Rich just shrugged off Mark’s irritable disposition, mainly out of fear of losing one more accountant.
Jill Evans worked the front cash register most of the time. She was a long-time trusted
employee who knew the store and the business inside and out. At the end of each day, she made sure that cash drawers reconciled with the internal totals inside the cash registers. She then bundled up the day’s cash and checks for each register, sealed them in envelopes, wrote the totals on the outside of each envelope, and forwarded the envelopes to Mark for recording and deposit.
Sometimes contractors with accounts stopped in the store to make payments on their accounts. Most of the time Jill was there to accept their payments and give them handwritten receipts from a receipt book; always leaving a carbon copy behind. If Jill wasn’t there, however, anyone else could accept contractors’ checks or cash and write them a receipt from the receipts book. Mark periodically picked up the receipts book for review as well as cash and checks collected from customers. He usually kept the receipts book for only a few minutes.
Right outside Mark’s office was a large bull pen where three commissioned salespersons worked.
They bid on large jobs, signed contracts, and collected deposit checks and sometimes payments on account. They would forward collected funds to Mark for deposit. They kept permanent copies of the contracts in their desk drawers.
Rich didn’t place a lot of faith in income statements and balance sheets. He mainly kept his eyes on the monthly sales figures, which were the figures that made him start to worry. Mark’s most recent monthly report showed that sales were off by about $100,000. He knew this couldn’t be right because sales had been better than ever.
“You must have made a mistake with the sales number,” he said to Mark. “I know when things are better and when things are worse.”
Rich expected Mark to get irritated as he usually did, but to his surprise, Mark merely said, “Perhaps so; let me check it and get back to you tomorrow.”
The next day Mark appeared with a new version of the report. This time the month-to-month sales had increased by about $50,000.
Trying to keep Mark from becoming irritated, Rich smiled and said, “Seems more reasonable. What was the problem?”
Mark just shrugged his shoulders, Rich nodded, and the meeting ended.
When Rich got back to his office, he received a call from the phone company saying that the phone bill hadn’t been paid and was about to be cut off. It seemed that Mark was really screwing up. First there was the error in the sales numbers and now an unpaid phone bill.
Rich usually didn’t pay much attention to the bank and routine bills, but in this case, he decided to login to his online banking service to see whether the check for the phone bill had been paid.
After Rich logged into to the online banking system, he was surprised that the balance in the operations account was only $48,245.12. This was much below Skywark’s normal target balance of $100,000. He was really beginning to worry. That night he went to the office alone and studied Mark’s financial reports for the previous three months. What he found wasn’t good: The numbers showed that sales had been steadily declining for the previous three consecutive months.
He then glanced at his phone and noticed that he had one voicemail message waiting. Someone must have called him after he had left for a late lunch at 4:30 A.M. The caller’s message follows:
“Hello, this is Winston Dansforth from the Pennsylvania Department of Revenue. I need to meet with you privately as soon as possible to clear up an issue relating to your payroll taxes.”
The caller then left his phone number with a request for a call back between 9:00 A.M. and 5:00 A.M… Rich recognized it as a landline number in Harrisburg, the state capital. He’s probably not a field agent, he thought, or he wouldn’t have requested a call back to his office.
Rich then shifted his attention back to Mark. It looked like he was getting ready to lose still another bookkeeper. It didn’t matter. Action was needed.
In the morning, Rich called Mark into the conference room next to Mark’s office. Rich brought Jill, his front cashier and most trusted employee, with him for moral support. The three sat at the conference table, and without a word, Rich placed copies of the financial reports for the previous three months on the center of the table.
“What’s going on around here?” Rich asked Mark in a tone of voice that failed to hide his anger. “Things don’t seem right.”
“Are you accusing me of something?” asked Mark.
Rich thought for a moment, and then replied: “Yes, actually, I am. The bank account is short, your sales reports are making no sense, you didn’t pay the phone bill, and now I’ve had a call from the Department of Revenue.”
Mark’s face turned red. There was no stopping his irritability from erupting into anger. “I’ve had enough of you and this place,” he yelled. “I quit.”
The conversation ended with Mark jumping up and storming out the door. Rich felt a gut-wrenching feeling pass through his body. The day was the 18th of the month and without an accountant, he had no way to send out monthly statements when the end of the month rolled around.
Rich immediately asked Jill to box up everything in Mark’s desk and told her, “Don’t let him back in here again if I’m not around. Make him wait up front in the store.” Rich then changed the alarm code and called the alarm company and changed the password. He told the company that Mark was no longer authorized to access the building.
The next day, Rich moved Mark’s computer to his own office. He had tossed and turned all night long, unable to sleep, trying to put all the pieces together. He had come to the conclusion that everything pointed to Mark’s embezzling funds.
In reviewing Mark’s computer, Rich came across a document file named complaint.docx in the electronic recycle bin. Inside was a letter addressed to the Department of Revenue with a carbon copy indicated for the Internal Revenue Service. The letter read as follows:
To Whom It May Concern:
I work for Rich Skywark, the owner of Skywark Hardware and Electrical. The business is located in the College Station area, and its address is
125 Union Street
Phone number 717-555-5555
I’m writing to inform you that Rich Skywark is systematically stealing payroll taxes. Instead of remitting the funds as he’s required to do, he’s sending you false reports and instead using the money to pay his personal monthly bills, and I strongly suspect that he’s been skimming some of the cash receipts in anticipation of the business shutting down. He’s months behind in paying many of his bills and creditors and is on the verge of financial collapse. I’m sure that in the end you will end up being cheated out of a lot of taxes.
Another thing that Skywark has been doing is overbilling the city on its orders with the store. This guy is a real crook. He would sell his own grandmother for a hundred dollars.
I suggest that you investigate quickly because he’s been doing this for a long time, and very soon it will be too late for you to recover anything.
I would appreciate very much if you keep this tip in confidence. Skywark is a ruthless man, and he still owes me back pay.
Sincerely, Mark Hansen
After Rich read the letter, it began to dawn on him that things were much worse than he had imagined. An hour later, two people in suits, Muttley Hammer and Janice Boracho, showed up at the front counter. They flashed badges, identified themselves as agents from the Department of Revenue, and told him they wanted to ask some questions.
“I’ll be happy to meet with you, but not here,” said Rich. “Let’s do this in my attorney’s office.”
Muttley did all the talking: “If you don’t cooperate, we’ll seek an immediate order to freeze all your assets and bank accounts. We need answers to our questions right now, no waiting. You don’t have to talk to us, but you’ll have to suffer the consequences if you don’t.”
Rich answered their questions and explained to them that Skywark’s payroll taxes were not segregated in a separate account, the story about his accountant quitting, and that all of his bank accounts were in the local area. Then they gave him a long list of documents that they wanted him to produce within seven days: financial statements, bank statements, and detailed payroll records.
Muttley and Janice seemed completely uninterested in hearing about Mark and Rich’s suspicion that the man could have embezzled the payroll tax money. “That’s your problem,” is all that Muttley would say.
Two days after the interview, things got worse. When Rich arrived at the office at the start of the day, there was a letter from the bank on his desk: the company’s unsecure line of credit had been frozen. When he called his usual contact at the bank, he was told that this had happened because “the IRS has filed liens against your personal and business properties.”
Rich called his outside CPA, who quickly confirmed that the lien had been filed for back payroll taxes. “You should have received a notice,” said the CPA.
This was the first that Rich had heard about any problem with the IRS. He met with his attorney, who advised him to hire an independent forensic accountant to investigate Mark.
Evaluate Skywark’s internal controls.
Evaluate how well Rich handled the problem with Mark.
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