Areas of the business most at risk for fraud

Case 1
Cal Smith Jr. is the night manager at a local doughnut shop that is doing very well. The shop sells doughnuts 7 days a week, 24 hours a day. Cal runs the graveyard shift by himself since none of the other employees want to work at night. Since opening six months ago, Cal has not been able to find anyone to work for him and therefore has never missed one day of work. Cal makes his bank deposits every morning before going home.
Cal feels that he is overworked and underpaid. The franchise owner, Kenny Jones, has praised Cal for his hard work and dedication to the company. Kenny’s only concern is that, once or twice a week, an entire batch of traditional glazed doughnuts has been thrown away because of overbaking. Despite these problems, Cal maintains a clean work environment and is consid- ered a valuable employee.
Recently, Cal has yelled at people on shifts before and after him for seemingly insignificant reasons. He was hired as manager because he gets along with everyone and is usually easygoing. His recent irritability could stem from the fact that business is slowing down, and he does not have much interac- tion with anyone at night. He also has been com- plaining that he has not been getting very much sleep. One day, Cal came to work in a new BMW, the car of his dreams. Cal said that his dad helped him buy the car.
1. What areas of the business are most at risk for fraud?
2. Identify any symptoms of fraud that appear to exist at the doughnut shop.
3. What steps could be taken to reduce opportunities for fraud?

Sample Solution

The areas of the business that are most at risk for fraud

The areas of the business that are most at risk for fraud are:
- Cash handling. Cal is the only employee who works the graveyard shift, and he is responsible for making the bank deposits every morning. This gives him a lot of control over the cash flow of the business.
- Inventory. Cal is responsible for ordering and receiving inventory. This gives him the opportunity to over-order or under-report inventory levels, which could lead to fraud.
- Payroll. Cal is responsible for submitting payroll information to the franchise owner. This gives him the opportunity to inflate his own wages or create ghost employees, which could lead to fraud.
The symptoms of fraud that appear to exist at the doughnut shop are:
- Overbaking of doughnuts. This could be a sign that Cal is trying to make up for inventory shortages by over-ordering doughnuts.
- Increased irritability. This could be a sign that Cal is stressed or guilty about his involvement in fraud.
- New car. Cal’s new car is a significant purchase, and it could be a sign that he has been using company funds for personal expenses.
The following steps could be taken to reduce opportunities for fraud:
- Install security cameras in the store. This would deter Cal from engaging in fraudulent activities.
- Require two signatures on all cash transactions. This would make it more difficult for Cal to steal cash.
- Have an independent auditor review the financial records of the business on a regular basis. This would help to detect any fraudulent activity.

It is important to note that these are just some of the areas of the business that are at risk for fraud. It is also important to note that the symptoms of fraud listed above may not be indicative of fraud. However, if you see any of these symptoms, it is important to investigate further.

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Areas of the business most at risk for fraud

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