ISSUES IN ACCOUNTING EDUCATION

Vol. 23, No. 2

May 2008
pp. 291297

Maxwell and Company: Staff Auditor

Embezzlement at a Small Client
Constance A. McKnight, Tracy S. Manly, and Pamela S. Carr
ABSTRACT: Maxwell and Company, a local accounting firm, discovers that one of its
employees has embezzled funds from a client. This case requires you to examine the
components of the fraud triangle and apply them to the facts of the case. The case
emphasizes the importance of quality control at accounting firms and internal controls
at small companies. In addition, the case provides you with an opportunity to analyze
the responsibilities of accountants, accounting firms, and accounting students.
Keywords: fraud; fraud triangle; professional standards; embezzlement.

MAXWELL AND COMPANY, CERTIFIED PUBLIC ACCOUNTANTS

Brief History of the Firm
In 1979, Jerry Maxwell graduated from college with an accounting degree. After seven
years at an international accounting firm, Jerry decided to start his own firm, Maxwell and
Company, CPAs (Max & Co.). This firm, located in Oakwood, caters to local clients;
specifically, Jerry and his staff of four professionals specialize in non-public companies.
The majority of the services provided by Max & Co. are tax planning and preparation;
however, the firm also performs bookkeeping services, audits (mainly for client debt compliance purposes), and other attestation services. Max & Co. has been a profitable and
successful business for Jerry. Tax returns are rarely questioned by the IRS, and banks
and other lenders trust the attestation services provided by Max & Co. Clients have come
to expect quality work from Max & Co., and they receive this quality.
Two Clients of Max & Co.
Rusher Automotive
Rusher Automotive is the most profitable car dealership in Oakwood. The company,
which sells approximately 100 new cars each month, has been a business leader in the city
for 30 years. Rusher sells about 20 percent more used cars than new ones each month. In
addition to the margins made on car sales, Rusher Automotive earns additional revenues
through its finance and service departments. These revenues for service and parts average
$200,000 each month. The dealership has a strong financial history and expects moderate
growth in the future.
Allen Rusher leads this family-run automotive dealership. Outgoing and personable, he
brings strong sales and customer service to this business, which he took over when his
father retired ten years ago. Rusher family members are responsible for all aspects of the
business except the accounting department. Allen knew accounting was difficult and wanted
Constance A. McKnight is an Assistant Professor at Arkansas Tech University, Tracy S.
Manly is an Associate Professor at the University of Tulsa, and Pamela S. Carr is an
Associate Professor at Arkansas Tech University.
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a CPA firm to perform bookkeeping services and tax preparation. Max & Co. has been
Rusher Automotives accountant for ten years. Allen has been very pleased with the firms
work. He was especially impressed with Kate Conrad, a Max & Co. employee in charge
of the bookkeeping services provided to Rusher over the past two years. He trusted her
completely and, although he did not understand accounting, felt she did an excellent job.
Craftset Jewelers
Craftset Jewelers is another important client of Max & Co. Founded and operated by
renowned artist and silversmith James Cannon, Craftset sells Cannons unique and highly
demanded creations. As Cannons reputation grew, he knew he needed a good partner to
run the business side of the company. Therefore, he enlisted an M.B.A. to manage the
production and finance departments, so he could concentrate on Craftsets creative development. Based on his education and experience with manufacturing companies, the new
partner quickly identified the need for internal controls at Craftset. Since the raw materials
and finished goods inventory consisted of small but valuable pieces, he implemented a
number of physical controls such as locks on the cases and security cameras. He also added
other extensive controls, including policy and procedures manuals and training for the
employees, formal accounting and finance documents, and an extensive computer system
with limited access. Although a total separation of duties is not present at Craftset due to
its small staff, both Cannon and his partner actively monitor the companys daily activities.
Each year, Max & Co. reviews Craftsets annual and quarterly results and prepares its taxes.
The Max & Co. employees assigned to Craftset consider it an easy engagement, because
Craftset presents impeccable, nearly error-free records.
ANNA THOMAS
Annas Employment and Education History
After working as a retail sales associate for ten years, Anna Thomas returned to college
to complete her accounting degree. She put in many hours at her sales job, but had not
received the compensation or respect she believed she deserved. She rarely missed work,
was punctual, and often exceeded her sales quota; however, she was never promoted or
given a substantial raise. Therefore, Anna decided a college degree was the key to her
financial success.
Anna worked hard in college while continuing her sales job, looking after her two
children, and supporting her husband who was injured at his job. Anna was determined to
make life better for herself and her family. During college, she was willing to get the job
done in her courses. Faculty members knew that Anna was bright, but her performance
was often marginal. She often skipped class, but when she was there, she was an active
participant in discussions and seemed to grasp concepts well. She often missed daily assignments, but she would compensate by earning higher scores on exams. Group assignments were particularly difficult for Anna, because they forced her to arrange meeting times
outside of class. Luckily for Anna, her classmates always covered her responsibilities when
she could not do the work. Most of them understood she could not work and complete all
her homework assignments while watching her kids. They also enjoyed the baked goods
she brought to meetings. Every once in a while, some fellow students would give her a
poor peer evaluation because she did not complete her portion of the assignment; however,
the good grades on the assignments outweighed the evaluations. She felt that most college
students could not comprehend her position because they did not have the same real-life
responsibilities.

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Maxwell and Company: Staff Auditor Embezzlement at a Small

Anna completed her degree with 150 hours and a 3.00 GPA. She was thrilled; her
family was very proud. Annas father-in-law, a prominent attorney, was especially overjoyed. Despite his help, Anna and his son had struggled with their finances. He was so
proud they had started taking responsibility for themselves. After graduation, Anna began
her job search immediately. She had many bills to pay, including payments on a new
convertible, a present she gave herself after graduation. She was glad to quit her sales
position and hoped she would receive the respect she felt she rightfully deserved as an
accountant.
Anna Joins Max & Co.
Busy season was about to begin, and one of Max & Co.s best employees, Kate Conrad,
gave her two-week notice. Kate was a smart, successful CPA who enjoyed the challenge
and the camaraderie of working in an office. Although she did not need to work due to a
large inheritance, Kate often worked 50-plus hours a week during her five years with the
firm. Jerry Maxwell was sad to see such a valuable employee leave the firm.
Annas resume could not have come to Jerry Maxwell at a better time. Although Annas
grades were not outstanding, Jerry was impressed that Anna did have a 3.00 GPA while
working full-time and maintaining a family. Anna appeared able to multi-task, a skill demanded of Jerrys staff. Jerry was also pleased that Anna came from a distinguished family
in Oakwood; he didnt feel the need to check her references, because the Thomas
family was well known and respected. Therefore, he hired Anna immediately.
When Anna started working, she was immediately assigned to Rusher Automotive to
take Kate Conrads place. This client was small and required only one staff accountant.
Jerry Maxwell not only introduced Anna to Allen Rusher and the other Rusher Automotive
employees, but also spent the first day with Anna on the job. Previously, he had spent three
days training Kate at Rusher Automotive, but since it was busy season, he had to focus his
attention on tax returns. He was thankful that Anna was a fast learner. Anna could not
believe all of the information needed just to perform bookkeeping services. Although she
felt she learned a lot in her accounting courses, they were nothing like actual on-the-job
experience. While Allen Rusher did not expect a new graduate to take over Kates job, he
trusted Jerrys judgment. After all, Anna had worked hard for years before obtaining her
degree, appeared eager to learn, and was eager to pass the CPA examination.
Annas Performance at Max & Co.
Anna worked for three years for Max & Co. with Rusher Automotive as one of her
main responsibilities. She performed bookkeeping services for Rusher, visiting the automotive dealership once a week. She was fortunate that a lot of the work could be done
from Max & Co.s office. After the initial learning curve, Anna excelled in the eyes of
Allen Rusher. She always got her job done on time and in spotless order. Her weekly job
responsibilities included recording journal entries, preparing checks for bills to be paid by
Mr. Rusher, and making trips to the bank and post office. Monthly, Anna prepared bank
reconciliations and compiled financial statements for review by Mr. Rusher. After approval,
Anna forwarded the financial statements to the bank, which were a requirement to keep
Rusher Automotives line of credit open. Within a few months, Allen Rusher completely
trusted Anna, just as he had trusted Kate. He didnt need to review the financial statements,
journal entries, or the supporting documents for payments. He did not understand accounting, and he believed in Anna. In fact, he was about to approach Anna about working for
Rusher Automotive full-time. She really seemed to be a part of the Rusher family and

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McKnight, Manly, and

dedicated to the job. When Rusher employees put in extra hours, Anna followed suit. Even
during her vacations, Anna took time to help at the dealership. Jerry Maxwell was pleased
with the high praise from Allen. He was relieved that he did not have to frequently review
her work. Since the client was happy, he worked on other projects and stayed out of Annas
way.
Anna was also assigned to Craftset Jewelers. This client required the work of two staff
accountants and a senior. At first, Anna was glad to have colleagues available to answer
questions, share the work, and help her get started. She learned a lot from the senior
accountant during the first year, although it was odd to be supervised by someone younger
than she was. Anna was impressed with the internal controls at Craftset and often commented on the impressive hands-on management style in every aspect of the business. Anna
liked working at Craftset, but often suggested to her colleagues there that it was Rusher
where she was the most needed. To the detriment of her Craftset audit team, Anna often
delayed working on the engagement whenever Rusher Automotive needed her. She was the
only staff accountant on the Rusher job; it was her top priority.
After three years, Jerry Maxwell began to receive mixed reviews from clients for Anna
Thomas. He was content with her praise from Rusher Automotive, but other clients, including Craftset Jewelers, were less impressed. Anna seemed to perform at or below expectations for a third-year staff on her other jobs. Her intelligence and confidence were
evident, but her work and effort did not convey her abilities. In addition, she often complained that her friends at large international accounting firms were making quite a bit more
money than she was. On the positive side, Anna recently passed the CPA examination. She
was professional at work and in the community; her expansive wardrobe always reflected
the role of a professional, and her demeanor was a positive reflection on Max & Co. Anna
also was making some new business contacts for Max & Co. through her membership at
the country club and the gated neighborhood where she lived. In fact, she had brought in
two new clients for the firm, a feat that was unheard of for a staff accountant. Anna was
well liked by her coworkers at Max & Co. She often had them over to her new home to
socialize after working hours. They enjoyed her company and were impressed that she was
juggling her career and family. Since her husband was still collecting disability, they assumed Annas father-in-law was footing the bill for some of their luxuries.
Unfortunately, Anna had a car wreck during busy season of her fourth year. Although
she did not have any permanent injuries, Anna had to stay in the hospital for three weeks.
During that time, Jerry Maxwell covered her work responsibilities. During the second week
of Annas absence, Jerry collected Rushers mail from the post office and began preparing
checks for payment. Jerry was surprised to see a very large credit card bill. Upon examination of the bill, Jerry noticed large charges at a home improvement store. Was Rusher
Automotive expanding its business? Jerry was curious, and when he brought flowers to the
hospital for Anna, he asked her about the charges. Anna could not answer Jerrys questions
and seemed rattled by the discussion. Jerry contacted the credit card company to determine
if the charges were valid. He discovered that the charges were authorized by Anna Thomas.
Further investigation revealed that the charges were for personal items for Anna. In response
to these charges, Jerry meticulously examined the dealerships accounting records and found
that Anna had been making personal charges and cash withdrawals on Rushers credit card
for two and a half years. Jerry also investigated her work with her other clients. He was
relieved that he did not find any additional irregularities; nevertheless, he was overwhelmed
and distraught over Annas actions at Rusher Automotive.

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Maxwell and Company: Staff Auditor Embezzlement at a Small

Requirements
1. Anna Thomas committed a fraudulent act by making personal charges and cash withdrawals on Rusher Automotives credit card. The accounting profession believes there
are three conditions necessary for fraudulent behavior. (See Statement on Auditing
Standards No. 99, Consideration of Fraud in a Financial Statement Audit. For additional explanation, you may want to review Buckhoff [2001].)
a. List the three elements and discuss how each of these elements is present in Anna
Thomas fraud at Rusher Automotive.
b. Why did Jerry not discover fraudulent behavior from Anna at other clients, specifically Craftset Jewelry?
c. Why had other Max & Co. accountants, specifically Kate Conrad, not perpetuated
fraud at Rusher prior to Annas hiring?
d. It has been suggested that there may be a fourth element of fraud (see Wolfe and
Hermanson 2004). Discuss whether this fourth element is present in Anna Thomas
fraud at Rusher Automotive.
2. Accountants have the responsibility to perform quality services with integrity, objectivity, and professionalism. Accounting firms have the responsibility to hire and monitor
competent personnel, so they can fulfill their assigned responsibilities.
a. What mistakes, if any, did Max & Co. make in hiring Anna and supervising her
at Rusher Automotive?
b. What steps do you think Jerry Maxwell should take to rectify the situation with
Rusher Automotive?
3. In the case, it was noted that Annas work as a student was marginal. Her classmates
often covered her responsibilities in groups when she could not complete her share of
the work.
a. Do you think Annas habits and attitudes in college and her sales job contributed
to an undesirable work pattern at Max & Co.? Why or why not?
b. If you were in a group with Anna in college and she was not participating, what
would be the best way to deal with the situation?

REFERENCES
Buckhoff, T. A. 2001. Employee fraud: Perpetrators and their motivations. The CPA Journal 71 (11):
7273.
Wolfe, D., and D. Hermanson. 2004. The fraud diamond: Considering the four elements of fraud. The
CPA Journal 74 (12): 3841.

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