AEROSPACE INDUSTRIES (AI) is a publicly held corporation headquartered in San Diego, California. Among other business lines, Al repairs jet aircraft engines under contracts with the United States Air Force and foreign and domestic commercial aicines. The Air Force work is on cost plus, time and materials contracts, and the commercial contracts are fixed-price. The company also has facilities in the UK and Singapore. 2. Most of the contracts require that Al inspect, service, repair, and retum the eragines within 30 days. There are substantial penalties for non-compliance, up to and including loss of the contract 3. The inspection and repair process is monitored on-site by FAA inspectors, who trust certify that the engines are in satisfactory condition before they leave the plant and Al is paid. 4. Al has recently fullen on hard times. Cutbacks in defense spending since the end of the Cold War and increased competition have hurt revenues, forcing reductions in staff and executive compensation packages. 5. More disturbingly, recent press accounts and anonymous letters have alleged that faulty Jepairs by Al led to engine failures on Air Force training jets, resulting in the death of young airmen. The government is suid to be investigating. On top of that, the company's Tuck office reccived Grand Jury subpoenas calling for records that suggest it is the subject of a defective pricing investigation 6. Al management, naturally, is quite condemed. Sara Fisher, the General Counsel, calls a moeting attended by Derek McGuire, che CEO, Mac Lewis, Vice President of Repair Operations, and you, a CFE who just recently joined the company as the Director of Internal Audit and Corporate Security 7. At the meeting it is agreed that you will conduct a confidential internal inquiry regarding the allegations of faulty repairs and report to Ms. Fisher.

A. Are aspects of Al's business situation conducive to fraud? If so, what?

B. Do the types of contracts Al performs expose it to any particular frauds?

C. What legal steps, if any, do you recommend the company take before beginning the investigation?

D. How do you respond to Lewis's request to be kept advised of the investigation? Why?

E. What do you do next?

Answer rating: 100% (QA)

AThere are several aspects of Al s business situation that could make it susceptible to fraud The first is the fact that it is a publicly held corpora... View the full answer