DCH Construction Fraud Analysis.
How historical lenses can affect the study of a historical topic.
October 14, 2019Write a 500 word description comparing the following certifications: PMI-ACP Scrum Alliance (CSM, CPO) /> SAFe
October 15, 2019DCH Construction Fraud Analysis.
Did Fraud happen here?
DCH Construction is a family business, consisting of ten office employees about three teams of constructions: cement work, wood work, and electrical work. The CFO reviewed the semi-annual budget-to-actual listing which is:
| DCH Construction | For 20X1 | For the year ending December 31, 20X2 | For the Six Months ending June 30, 20X2 | ||||
| Prior Year | Budget | Budget | Actual | Variance | |||
| Income – Cash basis | |||||||
| Project Income | $21,273,000 | $23,000,000 | $14,500,000 | $14,650,000 | $150,000 | ||
| Other income, change orders | $900,300 | $1,000,000 | $550,000 | $475,000 | $(75,000) | ||
| $22,173,300 | $24,000,000 | $15,050,000 | $15,125,000 | $75,000 | |||
| Construction costs – Cash basis | |||||||
| Labor | |||||||
| Cement | $5,318,000 | $5,584,000 | $3,350,000 | $3,759,000 | $409,000 | ||
| Wood | 2,127,300 | 2,234,000 | 1,340,000 | 1,386,300 | 46,300 | ||
| Electrical | 2,127,300 | 2,234,000 | 1,340,000 | 1,350,400 | 10,400 | ||
| Material | |||||||
| Cement | 2,393,100 | 2,513,000 | 1,508,000 | 1,721,200 | 213,200 | ||
| Wood | 957,000 | 1,005,000 | 603,000 | 632,200 | 29,200 | ||
| Electrical | 957,300 | 1,005,200 | 603,000 | 619,300 | 16,300 | ||
| Overhead directly attributed | 240,000 | 264,000 | 132,000 | 114,900 | (17,100) | ||
| Other costs | 50,000 | 53,000 | 40,000 | 208,500 | 168,500 | ||
| Total Cost of Sale | $14,170,000 | $14,892,200 | $8,916,000 | $9,791,800 | $875,800 | ||
| Gross profit | $8,003,300 | $9,107,800 | $6,134,000 | $5,333,200 | |||
| Gross Profit % | 36% | 38% | 41% | 35% | |||
| Operating Expenses | |||||||
| Salary – office | $3,100,000 | $3,500,000 | $1,750,000 | $1,760,000 | $10,000 | ||
| Occupancy costs | 760,000 | 800,000 | 440,000 | 435,000 | (5,000) | ||
| Insurance | 500,000 | 600,000 | 400,000 | 400,000 | – | ||
| Office and other Op.Ex | 800,000 | 900,000 | 550,000 | 750,000 | 200,000 | ||
| Total Op. Ex. | $5,160,000 | $5,800,000 | $3,140,000 | $3,345,000 | $205,000 | ||
| Net Income | $2,843,300 | $3,307,800 | $2,994,000 | $1,988,200 | $(205,000) | ||
| Net income as % of Gross | 13% | 14% | 20% | 13% | |||
DCH Construction
General environment.
DCH enjoys a good growth and a good reputation. Because it is a one-stop-shopping for general contractors for cement, wood, and electric work it often secures multi-year or multi-building contracts. The company is managed by the owner and her family. The owners enjoy a long lasting relationship with customers, vendors, and its own employees. As a result, employee turnover is low, and customer retention is high. Generally in each year, the first six months of the year is typically busier with the last quarter of each year with almost no activity, weather permitting.
The Company has several internal processes, and they are:
Revenue recording (cash basis) although DCH reports its income on a completed contract basis for tax and GAAP purposes, the internal budgeting is always done on cash basis. As revenues is received, typically by wire, the CFO writes up a summary-sheet that indicates to the Accounts Receivable clerk how to apply the receipt. The A/R clerk records the receipt, and provides a monthlyA/R package which includes:
- List of receipts, supported by the summary sheets prepared by the CFO
- A/R Aging Report, including any adjustments
- Cash balances per bank and per book
Expense recording (cash basis) – in the past DCH experience stolen checks. So the Company utilizes “positive pay”, which means that all check numbers and check amounts are transmitted to the bank on the day a check is issued. Most checks are written with positive pay. Using “positive pay”, if an unanticipated check is received, the bank will notify DCH of an exception. Other checks are written directly to third party: because this is a construction company, DCH receives from time to time claims for damaged cars and building near its construction site. For this, they use an in-house paralegal who settles such claims.
Accordingly, almost all of the DCH checks are prepared by an A/P Clerk, signed by the CFO and given by the CFO to a trusted relative who then mails the signed check, and returns the invoices and related paper work to the A/P clerk. Other checks are prepared by the paralegal, signed by the CFO and returned to the paralegal until the claim is settled.
Payroll checks are prepared by a third party processor, and the monies are deducted directly from the Company’s payroll cash account, after the CFO approves the payroll.
Inventory
The Company attempts to maintain minimal inventory on hand, and only orders the amount of goods that are to be used within 45 days on a construction project. Because inventory is generally not held on hand, the inventory costs, or the costs of material are recorded as cash expenditures in the budget, under “material”.
Bank reconciliation
The CFO, who is also an owner reconciles the check book and provides a bank reconciliation to the CFO auditors. The audit is performed at the end of each year. The monthly package for the auditors include.
- Bank reconciliation
- A/R Aging
- List of disbursements
Required
- What, if any are analytical symptoms of fraud?
- What, if any are symptoms of fraud with respect to internal controls?
