Stuart P. Harber, a certified public accountant, has worked for the past eight years as a payroll
clerk for Southeast Industries, a small furniture-manufacturing firm in the Northeast. Stu
recently experienced unfortunate circumstances. His newborn baby girl, Stuann, required
major heart surgery and the medical bills not covered by Stu's insurance have financially
strained his family.
Stu is a hard worker and a model employee. Although he received regular performance raises
during his first few years at the company, his wages have not increased in the past three years.
Stu recently asked his supervisor, Rufus Johnson, for a raise. While Rufus agreed that Stu
deserved a raise, he told Stu that he could not currently approve of one because of \"sluggish
sales.\"
Stu continued his accounting duties and the financial pressures in his life continued. When
salesperson Jenna Green quit suddenly over a dispute with management, Stu came up with a
plan. Since he processed employee terminations, time card approval, and paycheck distribution,
he decided to delay Ms. Green's termination, forge the weekly time cards with his signature
and then cash Jennas checks for himself. (Since he distributes the paychecks every two weeks
no one would find out anyway.) In fact, no one ever discovered his scheme and Stu continued
the practice for two full years, \"earning\" Stu an extra $200,000.
1. How does Stu's scheme affect Southeast's balance sheet (specifically Cash and Retained
Earnings) for the year? Ignore income taxes.
2. How does Stu's scheme to continue to pay Jenna affect the income statement (specifically
Revenues, Expenses and Net Income)?
3. Use the fraud triangle from (Chapter 4 Exhibit 4.5) to identify the three elements of the
fraud triangle and to explain how Stu's situation meets each of these elements. Write two to
three sentences to explain each fraud element.
4. What internal controls could have been put in place to prevent Stu's paycheck scheme in the
first place? (Name at least three. Don't make these up; use specific internal controls outlined in
Chapter 4.)
