Question

Great news! The Board hires your firm to help them identify the cause of the unexplained increase in their Inter-Company Receivable. At the meeting the Board provides you with the attached organization chart and tells you to get started – anyone and everyone will be at your disposal should you need to talk with them or request information.

1. Who do you talk with first? Why?

2. What information will you request?

3. If fraud is occurring, who could be involved?

Diane Smith CEO and Chairman of the Board Jerry Tidwell, Chief Information Officer Kevin Boswell, VP of General Ralph Jones, VP of Regulated Services Stan Lepird, ChiefJim Stephens, CFO Legal Officer Services Jeff Thomas Controller Karen Snibly Database Mgr for Regulated Services Andy Squire Assistant VP Scott Nelson Director of Operations Jennifer James Accounting Supervisor Nancy Gillis, Accounting Manager Sandy Little Database Mgr for PS Jackie Smily Operations Clerk Tammy Parker Accounting Clerk Rick Morris Accounting Clerk Cindy Fisher Accounting Clerk Chris Johnson, Accounting Clerk

Answer 1

Answer :-

Intercompany transactions - any transactions involving dealings between the companies in the group. There are three types of intercompany transactions, which are:

• Intercompany debt. Eliminates any loans made from one entity to another within the group, since these only result in offsetting notes payable and receivable, as well as offsetting interest expense and interest income. These issues most commonly arise when funds are being moved between entities by a centralized treasury department.
• Intercompany revenue and expenses. Eliminates the sale of goods or services from one entity to another within the group. This means that the related revenues, cost of goods sold, and profits are all eliminated. The reason for these eliminations is that a company cannot recognize revenue from sales to itself; all sales must be to external entities. These issues most commonly arise when a company is vertically integrated.
• Intercompany stock ownership. Eliminates the ownership interest of the parent company in its subsidiaries.

For the 1st two points, approval from the board/chairman is required to be obtained as per legal requirements ( In India Sec-188 of companies acts 2013 deals with it ) and in (USA - Sarbanes Oxley act Keeps an eye on and provide conditions to transact the same.

so Ist one to be interview will be - Diane Smith - CEO and Chairman of the board.

2.Information will be requested:-

1. Special / Board resolution copy stating the approval for the transaction between group companies

2, Calculation of ARM LENGHT's PRICE or Discounted price offered to Inter company and the approval for the same.

3. Business purpose for entering into those transactions.

4.Whether any exceptions to the company's established policies or procedures were granted

5. Evaluation of the financial capability of the related parties with respect to significant uncollected balances, loan commitments, supply arrangements, guarantees, and other obligations, if any

6. Compliance of Laws and regulations.

3. If fraud is occurring, who could be involved?

Answer-

1. Diane Smith - CEO and the chairman of the board - As to approve the unauthorized transactions with inter-company ( related parties)

2. Jim Stephens - CFO - As to every financial matter should 1st come and verified by him also.

3. Ralph Jones/Kevin Boswell - depends on the nature of services given to the intercompany

4. Stan Lepird - Maybe because of legal compliance they have to reach out to him and he might end up colluding to it.