Something's Fishy at Jones Company

Classroom Case Takes Auditors from Investigation to Confession


By By Martin J. Coe, MBA, ACFE Educator Associate, CPA, CISA; Jeffrey Coussens, MFA; and John Delaney, DBA, ACFE Educator Associate, CPA, CIA

2009-MayJune-Somethings Fishy at Jones Co 
In this following fictional case designed for classrooms or seminars, an intrepid seasoned internal audit manager and an inexperienced but willing staff auditor investigate suspicious financial activity at Jones Company. Their discoveries reveal their hunch was right, and they stop the fraud.

 

The authors have designed this fictitious case to illustrate in courses or seminars some of the more important aspects of the fraud examination process. Of course, the authors have simplified the process to provide a more concise classroom example. Teaching notes and an accompanying DVD with video segments (not produced by the ACFE) are available at no charge from Martin Coe.

Custom Parts Inc. (CPI) of Chicago is a large original equipment manufacturer (OEM) of vehicle parts in the automotive industry. CPI has grown exponentially in the past 10 years because it purchases smaller OEMs that have an established customer base.

Though CPI typically allows the companies it purchases to continue their sales and production offices, it administers all other functions from its corporate headquarters. CPI’s financial analysis group periodically scrutinizes each company or “segment.” The group became concerned during an analysis of one of its newest acquisitions – the Jones Company.

Jones Company sells its own manufactured OEM parts and those it buys from other companies. Also, Jones doesn’t have equipment to manufacture some of its in-house parts, so it outsources them to local machine shops.

In addition to the OEM relationships, Jones holds several patents that allow its gross profit margin to be about 40 percent of sales because patent holders can charge higher prices until their patents expire. So when the gross profit margin for Jones dropped to 25 percent, CPI’s financial analysis group took a closer look at Jones’ segment data. The group then asked the internal audit manager, Barb Reynolds, to investigate further.


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