Jiffy Corporation has its seen its earning increase steadily each quarter from 2004 (its founding) through 2008. Because of the recession, Jiffy has struggled to provide investors with the same level of growth. Jiffy’s CEO, COO and CFO whose wealth is significantly leveraged by Jiffy’s equity-based compensation, are trying to focus on how to keep the company on a growth climb despite the hard time. Interestingly, each quarter, Jiffy has been able to meet or beat the investor’s forecasts.
Jiffy’s typical business model is to ship its products to customers on account with payments due within 30 days after delivery. Jiffy’s products are manufactured in two plants, one in Columbus, Ohio and the other in Houston, Texas. Jiffy’s inventory is stored in 20 different warehouses located in 15 states. Many of Jiffy’s smaller customers are start-up companies. Surprisingly, Jiffy has a relatively rate of uncollectible accounts relative to others in its industry.
Anderson & Cooper is Jiffy’s external auditor. You are the engagement partner assigned to Jiffy’s audit.
Please respond the following question:
1. What are some of the red flags for possible management fraud based on the client’s profile?
2. Identify three types of management (financial statement) fraud that might be attempted in this situation. What red flags will you look for to identify the frauds, and how will the frauds be attempted?