Prepared by W. Morley Lemon
Peter Gunn works in the forensic accounting department of a large national public accounting firm—Kraft, Mulhuland and Brown (KMB). Richmond Corp. is an audit client of KMB and has asked that the forensic accounting department of KMB do a review of the purchasing procurement area of Richmond. Mary Thompson, the president of Richmond, advises KMB that the audit committee suggested that the forensic accounting department be called in to do a normal review of the purchasing procurement area because several members of the audit committee believe that this particular part of the firm is a fairly high risk area.
Peter Gunn organises a team of two of his staff and sends them in to the review of the purchasing procurement area of Richmond. In the course of their review, the forensic group observes that certain red flags seem to be present relating to the tendering process.
In the review of the tendering process, the forensic group discovers that a certain contractor was given a lot of work although his company was not necessarily always the lower bidder. A review of the files indicated that the same Richmond company employee, Bob Newton, made the decisions in each of these contracts. This information suggests a red flag to the forensic group. The next step for the forensic group was to do a background check on Bob Newton. The forensic group talked to both the KMB and Richmond staff and found that Bob Newton had worked for Richmond for a long time and was very highly regarded and respected by his peers and by the audit firm.
Despite this positive information, the forensic group decided to conduct a more extensive and in-depth background check on Bob. It’s important to know at this point that this information search was not public knowledge; only the forensic group and the forensic partner, Peter Gunn, were aware of the investigation. This background check included looking into Bob’s lifestyle, his financial situation including mortgages, houses etc., his cars and assets, and running a credit check. As a result of this background check, it was discovered that there was no mortgage on Bob’s house, his Muskoka cottage or his winter property in Florida. All of these properties had been bought with cash within the last five years. A check of the company’s personnel files indicated that Bob was not receiving a significantly large salary.
Peter Gunn and the forensic group went to the audit partner, Art Went, to indicate that there could be a potential problem. Art was not very comfortable with their information. For one, Richmond was his biggest client and represented fifty percent of his billings. In fact, Richmond was large enough to represent seven and a half percent of the total billings for the office. As a result of these pressures, Art indicated that Peter Gunn and the audit group should drop their investigation and leave it up to the auditors to find the fraud during their audit. He indicated he wished to follow this route because he felt that the forensic group had found a problem that the audit group had missed and Richmond would not be very happy that KMB had to bring in experts to find this difficulty—a difficulty that the auditors should have found out in the normal course. The audit partner felt quite strongly that Richmond was at risk and that he would be the one that would be the big loser if Richmond went to another firm.
What should Peter Gunn do in this particular situation?