Question

Frank Lou had recently been promoted to construction manager at a development firm. He was responsible for dealing with contractors who were bidding on a multimillion-dollar excavation job for a new high-rise. Times were tough. Several contractors had gone under recently, and the ones left standing were viciously competitive. Each contractor was responsible for submitting financial statements of his or her company along with the bid. Frank knew that the development firm was carefully reviewing each company to ensure that it had the necessary cash flow to complete the project. The last contractor it had hired declared bankruptcy before the project was completed. That morning, four bids were sitting on Frank’s desk. The deadline was midnight, and the bids would be opened the next morning. The first bidder, Bo Freely, was a tough but personable character that Frank had known for years. Frank had lunch with him today, and after a few beers, Bo hinted that he had “inadvertently” left some cash payments of operating expenses out of his statement of cash flows so that his operating cash flows would look better. Bo told Frank that he was waiting on several clients to pay him for past jobs but that he knew he would be receiving the money shortly. After lunch, Frank thought carefully about what Bo had said and decided not to mention anything to his company. He knew that Bo’s firm was a reputable company and would be around a long time.

1. Is Frank’s company hurt in any way by this fraudulent action?
2. How could this action hurt Frank?
3. How can a business protect against this kind of fraud?

Answer 1

Part 1

Though this fraudulent activity has no significant impact on Frank’s company in short-term, but may hurt it in the long run. The selection of contractor should be done on the basis of several criterion such as contractor’s credentials, experience, qualifications, bid amount, etc. however, the selection of contractor solely on the basis of Frank’s personal interest may harm in the company in the form losing huge of money, if such kind of fraudulent activity keeps on going.

Part 2

If Frank is caught for such actions, then of course, he is about to get hurt by this action. The criminal charges may be placed on him for corporate fraud. He would surely lose his job for this fraudulent, he may be penalized or receive summons, or in the worst case he may go to jail.

Part 3

The company needs to overcome this internal control weakness by segregating duties properly related to the biding process. All the responsibilities of entire bidding process, liking inviting bids, evaluating bids and selecting the best contractor, should not be in one hand, rather different employees should be held responsible for different activities. In this way, it would be easy to control and prevent the fraudulent actions undertaken by Frank.