Elizabeth (Liz) Lake lives in a million-dollar mansion in Don Mills. She spends time with her three children at an 1134-square-metre waterfront “cottage” in central Ontario. The attractive widow also gets about $22,600 a month—or $270,000 a year—to maintain those properties and cover living expenses.
Prominent realtor Joe Barnicke says it’s all possible with money her late husband stole from him, his firm J. J. Barnicke Ltd.—and a family trust fund. Liz Lake has kept that lifestyle for almost two years since her husband jumped in front of a train at York Mills subway station. Jim Lake committed suicide on the morning of March 18, 1996, less than an hour after Barnicke confronted him at the firm’s downtown office about a lot of missing money. Lake, the firm’s star chief financial officer, excused himself and never returned.
Barnicke and his company immediately filed a lawsuit in court against Liz Lake and her husband’s estate to recover what was left of $19.8 million Lake allegedly swiped over a decade. But Barnicke, the firm’s 74-year-old chairman, has found it isn’t easy trying to get any of the alleged stolen money back. The courts are slow and Liz Lake is fighting him all the way for the mansion, country estate, cars, boats, snowmobiles, and life insurance proceeds. Barnicke won’t talk publicly about the case but acquaintances say he’s bitter and disillusioned over Liz Lake’s continuing monthly “allowances” and the lengthy court proceedings. In the battle over the estate, Barnicke figures there’s now only about $4 million to $5 million left—including life insurance proceeds—after all the spending.No wonder. One of Lake’s own accounting reports filed with the court reveals the couple spent almost $7 million after tax in the three years before his death. Lake fuelled that spending by jacking up his pay through misappropriation of Barnicke funds, according to documents filed in court. After a brief probe, Barnicke and top-flight forensic accountants Lindquist Avey McDonald Baskerville Inc. said a paper trail revealed that the likeable Lake moved money from the company’s operating funds and the chairman’s personal accounts to a payroll system. He then transferred the money into personal bank accounts at the Bank of Nova Scotia.
Lake ran the payroll system, from which he was paid. Investigators found a copy of Lake’s T4 form to Revenue Canada in his briefcase showing a gross income of $2,468,938.63 for 1995. But Lake’s annual salary never exceeded $110,000, Barnicke said in the claim. Barnicke’s lawsuit also alleges Lake, who was 36 when he died, had improperly moved $1.5 million from a trust fund for Barnicke’s three children to his own account. Barnicke said his signature on the transfer requests were forgeries.
Liz Lake denies her husband stole the money. If her husband did, it’s Barnicke’s own fault and he should suffer the losses, her statement of defence said. If the company had shown a minimal amount of diligence, it could have stopped any alleged losses and Lake might still be alive, she added. “The plaintiffs (Barnicke) by their gross negligence caused or contributed to the death of her husband and the father of her three children,” the statement of defense said. She insists that all money received from the company was earned, “and was accurately recorded in J. J. Barnicke Ltd.’s books and records.” Those books and records were kept at the company offices and in fact Lake paid taxes on the full amount. As well, Elizabeth Lake points out, the Barnicke books were made available to accountants Ernst & Young “at least annually” and that all her husband’s earnings were deposited in their joint account at the Bank of Nova Scotia. (The bank is also named in the company’s civil suit.)
Joe Barnicke, the blustery patriarch of the company, scoffs at the suggestion they are responsible for any financial loss. “He stole the money,” he told The Toronto Sun this week. “He stole the money. That’s all we can say.” Meanwhile, Barnicke’s lawyer, Chris Osborne, said the cost of paying for Liz Lake’s lifestyle is “bleeding” the estate of hundreds of thousands of dollars. Reports placed on the public record suggest Liz and Jim Lake didn’t hold back in the last years of his life. Lake collected annual paycheques ranging from $2.2 million to $4.3 million in gross income from 1990 to 1995. Lake’s own printout of “inflows” and “outflows” covering July 1993 to February 1996 disclosed that income from work, interest, and revenue on property sales totaled about $7 million. But the outflows for expenses left them with only $35,000. Furthermore, (the receiver) said at one point the couple regularly rang up credit card charges of more than $43,000 a month. The Lakes had “very lavish spending habits,” the receiver noted.
a. Comment on the apparent control weaknesses at J. J. Barnicke suggested by the events in the above story. Explain how these weaknesses increased the risk of fraud in the company.
b. Assume the role of the judge. Which party’s arguments do you think are more convincing? What additional evidence could each party provide to you that would strengthen their case?
c. What audit procedures might have been used to uncover the transfer of company funds to Mr. Lake’s bank account?