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Forensic Accounting Case Study Series

Sponsored by Deloitte FAS LLP and the

Deloitte Foundation Sales Commission Fraud

Bags Medical Device Company

Case No. 2-1

Overview: Given that first year associates are required to exhibit a certain level of analytical skills, the case has been developed to test the students’ ability to use Microsoft excel to analyze patterns and draw relationships. The notes from the informational interview with the CEO, Steve Flanders and the other company employees have been designed to get students thinking of how information gathered during interviews help in SOLVING THE PUZZLE!!

Case Study: The final deliverable should reflect the student’s personal work product.

Deliverable: Report: Each student is expected to submit the following documents;

A three-page Summary of Findings to include:
1. A one-page Executive Summary with one paragraph summarizing the initiation of the investigation, one paragraph summarizing what your investigation involved, and one paragraph summarizing the findings.
1. Up to two pages providing the details and conclusions of your investigation.
  1. Describe how the possible fraud was perpetuated and by whom?
  1. Quantify the amount lost by the company by the fraud occurring?
  1. A summary of recommendations to prevent fraud in the future.
1. Attachments could include summaries and details behind your investigation with the following detailed:
  1. Primary, Secondary and Total Commissions for each contract.
  1. Showing the commissions paid by year for each individual.
  1. Showing a count of the number of contracts by individual by year.
  1. Additional details supporting how the fraud was perpetuated and by whom?
  1. Charts or tables which quantify the amount lost by the company by the fraud occurring as described above.

Forensic Accounting Case Study Series

Sponsored by Deloitte FAS LLP and the

Deloitte Foundation Sales Commission Fraud

Bags Medical Device Company

Case No. 2-1

Company Overview: Bags Medical Device Company (“BMDC” or “the Company”), based in Arlington, Virginia, sells medical devices to hospitals and doctors in private practices across the United States. BMDC was founded in 1998 by Steve Flanders who began selling the devices from his garage. Informational Interview with the CEO Steve Flanders is provided as follows:

Question: How was the issue identified by the client?

Answer: The issue was identified from an anonymous call into the whistleblower hotline on 1/12/12.

Question: Are there any further details regarding the allegation that has been provided to BMDC?

Answer: Based on the call from the whistleblower hotline there is an alleged collusion amongst sales, legal and accounting to list additional sales members as secondary sales representatives on contract sales to allow for unmerited commission payments.

Question: What are the sales commissions related to?

Answer: The sales commissions are related to a BMDC proprietary product.

Question: Can you explain the sales commission process?

Answer: The sales commissions process is:

1. Sales reps are responsible for meeting with the customers and collecting sales orders after an initial contract is established.

2. For a contract to be established, a manager from the contracting department must approve the terms and conditions of the contract (price, discounts, rebates, etc.) Each contract lists the sales rep that is the primary company representative (receives 10% of the contract price). The contract also allows for a secondary sales rep (receives 5% of the contract price); this is someone who would have assisted in the sales process.

3. Once it’s been approved, each contract is entered into the accounting system where the commissions are automatically calculated. This process is overseen by the accounting department. The accounting clerk is responsible for reconciling commissions paid to contract price. Once the information is reconciled and entered into the system, the contracting manager then reviews the contract entry and confirms that information was entered properly. It is not the responsibility of the accounting clerk to confirm that the salesmen are appropriately listed on the contract.

Question: How has the recession affected sales?

Answer: The company was hit hard by the recession and sales have been down the past couple of years, but analysts have high hopes and have projected an 8% earnings growth this fiscal year.

Question: Are there any suspicions as to who may be involved?

Answer: The Whistleblower identified 5 individuals who he believes may be involved:

1. Mitchel Bogart – Sales Rep

2. Carly McFinnigan – Accounting Clerk

3. Amanda Smith – Sales Rep

4. Willie Johnson – Sales Rep

5. Barry McMillan – Contracting Manager

Other Information:

1. Our group of 15 salesmen works really well together and they are all very friendly with one another. The exception is one individual who the CEO has told us is his star salesman. This person consistently is in the top 3 every year for commissions. While the individual occasionally collaborates as a secondary to other salesman’s efforts, he refuses to use secondary salesman on his primary sales.

2. Mr. Flanders admitted that he puts a considerable amount of pressure on the sales force to meet and exceed established quotas.

Your consulting firm, Rango Fraud Specialists, LLP has interviewed various BMDC employees including the five (5) individuals identified by the whistleblower to gather information (see below).

Some of the information is purely speculative. Bear in mind that some of it came from the interview with Susie Sanders, who is known to be the office gossip queen.

Mitchel Bogart Background: Mitchel has been with BMDC for the last 7 years. He came on-board based on a recommendation from one of his former colleagues at another medical device company. He was known to have a lot of connections within some of distributors that handle BMDC’ products. He started off slowly in his first two years at BMDC due to a non-compete agreement with his former employer. In the beginning of his third year (2007) his sales started to climb and by the second half of the year he was beating out other sales reps.

Personal History – Mitchel grew up in an area that connected him with high level executives at medical device distributors. Most of his customers are old friends of his. There is a rumor going around the office that Mitchel likes to live above his means since he just bought a brand new Porche.

Related Character(s) – Willie – Mitchel’s wife and Willie’s soon to be ex-wife belong to the same knitting club.

Carly McFinnagan Background: Carly has been an accounting clerk at BMDC for almost 7 years. She is currently in the same position that she was hired into. Her main responsibility is to calculate the commission payments to each of the sales reps. In addition, she is responsible for confirming that the classification of the sales reps as primary or secondary is appropriate based on the contract information filled out by the contract department. Carly has been up for promotion to accounting manager for the last 3 years and has been passed over each time. Based on her understanding, the company informed her that they have not been able to identify anyone who can fill her current position. Her belief is that the company can’t find someone else to take this low paying job.

Personal History – Carly has been married for the last 15 years and lives in an affluent area near her job with her 3 boys. Her husband is a big time investment banker.

Related Character(s) – Barry – Carly has been Barry’s neighbor for the last five years. Barry and her husband have become good friends over the years.

Amanda Smith Background: Amanda has been with BMDC for the last 6 years. She started as a sales rep and has held the same position since then. Amanda was a top 5 salesperson in her first four years, but during the last two years, she has been in the bottom 5 in sales. Because she set the bar so high initially, management increased her sales quota. But during the last two years she has missed her sales quota and fears that if things don’t change soon she could be out of a job.

Personal History – Amanda is divorced and supports her two children along with her niece who has just moved in with her.

Related Character(s): Barry McMillian – Longtime friend of Amanda’s since they attended the same college together. There is an office rumor that Willie and Amanda have been secretly dating since Willie and his wife separated last year. The company does not allow inter-office dating.

Willie Johnson Background: Willie has been with BMDC for 4 years. Previously, Willie worked for one of the leading pharmaceutical firms and worked in their sales department for 10 years. Because of his experience in sales, Willie has had an easy time meeting his quotas since he joined BMDC.

Personal History – Willie’s personal life is in disarray as he is going through his second divorce and it is rumored that he has a severe gambling problem.

Related Character(s): Mitchel – Mitchel’s wife and Willie’s soon to be ex-wife belong to the same knitting club. There is an office rumor that Willie and Amanda have been secretly dating since Willie and his wife separated last year. The company does not allow inter-office dating.

Barry McMillian Background: Barry has been with BMDC for about 8 years now. He started off in sales and has since moved into the contracting department. His role is to make sure the terms of the contract are within the company’s pre-established limits and that all of the relevant information (client name, price, discounts, rebates) are properly listed. In addition, he inputs the sales representative names on each contract and classifies each representative accordingly as the primary or secondary.

Personal History – Barry is happily married to his college sweetheart of 10 years and has 3 loving kids. He lives in a very affluent area near the office.

Related Character(s): Amanda Smith – Long-time friend of Barry’s since they attended the same college together.

Bradley McFinnagan – Barry’s next-door neighbor for the last 5 years and they have since become very good friends. Bradley is married to Carly McFinnagan.