ACTG 321

Visio #2 and In-Class Exercise

Background

West Coast Bicycles (WCB) is a chain of bicycle retail stores with 13 locations throughout Southern California. The company also maintains an office/warehouse building. Each retail store is staffed with four to six employees: A manager, assistant manager, head mechanic, and other sales people or mechanics based on seasonal needs. Once a week, each store gets a delivery of inventory from the warehouse, and sends "Daily Receipt Envelopes" from the prior week back to the office. Daily receipt envelopes are filed and stored at the office.

At the end of each day, the manager in charge of each store (i.e., the manager or, in their absence, the assistant manager) goes through the following closing process.

1.Close the credit card processing device, which sends daily credit card transactions for processing. Two days later, the credit card total is deposited in WCB's checking account.

2.Close the point of sale system (i.e., the computerized cash register system).

a.The computer prints a summary of the cash, check, and credit card totals.

b.All the transaction information (including items sold and method of payment) and the cash/check/credit card subtotals are electronically transmitted to the main office. This data is used to update the inventory records for the company and is available for print out at the main office.

3.Prepare a deposit bag

a.Count the cash (leave $100 in drawer), place it in a plastic cash bag, and seal the bag.

b.Endorse the checks and compute the subtotal.

c.Fill out a deposit slip.

d.Place deposit slip, check, and cash bag in a deposit bag.

4.Prepare a "Daily Receipts Envelope" (5.5"x8", preprinted form on outside)

a.Place all receipts from the day in the daily receipts envelope, along with summary totals of cash, check, and charge (see 2a above).

b.Write manager name, date, and store number on outside of envelope.

c.Write computer totals, actual totals, and difference on outside of envelope

5.Put the cash drawer, deposit bag, and daily receipts envelope in the desk and lock the drawer.

The following morning, the opening manager (i.e., the manager or, in their absence, the assistant manager) goes through the following process.

1.Unlock the desk, and count the cash drawer. Verify it is $100.

2.Take the deposit bag to the bank and deposit cash and checks into WCB's checking account.

3.Upon return, place a copy of the deposit slip in daily receipts envelope and seal the envelope.

Once a month, the bank sends WCB statements for the checking account. Deposits are listed separately for each of the retail stores. Periodically, WCB will conduct an internal audit of the deposits, and verify that the amounts reported by the POS system, the daily envelopes, and the bank deposits all match. The president, vice-president, and other executives can also print out reports each morning which show the transactions, by store, from the previous day. However, they usually only do so on Monday to review sales from the prior three days.

West Coast Bicycles is technically a corporation, but 95% of the stock is owned by Beck Davidson and the remaining 5% is owned by his wife, Raquel. Thus WCB effectively operates as a sole proprietorship, with Mr. Davidson serving as owner and president.

Retail store managers are paid a salary plus a commission based on the monthly sales from their store. All other employees are paid hourly, but the assistant manager and head mechanic also receive commission based on their sales and repair totals, respectively. While store managers are responsible for generating revenue, Mr. Davidson and his vice-president, Jim Millhouse, are responsible for keeping costs down. They negotiate the leases for each store, purchase the inventory (for the company as a whole), negotiate salaries of all the employees, and pay all costs of running the business (e.g., insurance, utilities, etc.). However, they do not share cost information with the store managers. Thus managers know the revenue of their store, but not the profit.

A few store managers speculate that Mr. Davidson does not share profit information with them because the profit is large, and Mr. Davidson does not want them to know how rich he is becoming. They notice that Mr. Davidson drives a newer Jaguar. They feel WCB owes them higher wages and better benefits, but Mr. Davidson is too selfish to share. One such manager, Peter Files, has worked for WCB for seven years. However, his passion is music and he plays bass in two bands. But music has yet to be profitable for Mr. Files. Studio space is very expensive to rent, and Mr. Files is constantly struggling to afford studio time to practice and record music. The small amount he makes for playing gigs does not cover the cost of instruments and equipment, let alone studio time.

In the early 2000's, the economy was struggling after the technology bubble burst and the terrorist attacks on 9/11/2001. In addition, the bicycling industry was contracting and changing. The mountain bike boom that fueled the industry during the 1990s was fading. Sales were sluggish. WCB was running on minimal staff, and developing a strategic plan to respond to the business challenges ahead. Some routine tasks were being ignored, but such tasks felt unimportant.

One day, almost on a whim, Mr. Davidson said to his operations/accounting manager, "You know, we have not done any audits of deposits in over a year. Will you do that this week?"

"Sure," the operations/accounting manager replied. "Which store should we do?"

Mr. Davidson paused for a moment. "Ummm....It doesn't really matter.Just do store 1." Store 1 was managed by Peter Files.

The operations/accounting manager conducted the audit, and found that during the prior year the bank deposits made on Mondays contained no cash. On average, the weekend cash total was about $500. Thus about $25,000 in cash was missing. Mr. Files was manager in charge of store 1 on Mondays, and made the deposits. He denied stealing any money, but he had no explanation for how or where the cash could have gone missing. Over the following month, a complete investigation ruled out all other possibilities, so Mr. Files was terminated for theft.

Assignment questions

1.Create a flowchart of the closing/banking process at WCB.

2.Identify the three sides of the fraud triangle. Explain how each side applies to Peter Files theft.

3.What should have WCB done to prevent the theft?

4.WCB did not report Mr. Files to the police. Should they have and why or why not?