Reference no: EM132686846

Question - Case Study - It does not take much intuition to recognize that the gaming industry needs an especially strong internal audit function. Like financial services, the gaming industry is all about money, but it is also about hospitality, entertainment, trans- portation, and the unobtrusive policing of large numbers of pumped-up, excited people having a good time.

A senior internal auditor was invited to a meeting of casino executives to discuss the controls that would be needed around a new marketing program, initi- ated by the vice president of marketing, who was present at the meeting. This entrepreneurial executive was widely admired at the casino as the largest reve- nue producer in the managerial ranks. His reach extended far. In fact, he had a second business of his own, in partnership with the casino: a junket business that transported tourists and games players by bus and air to the casino for a day or more of enjoyment. Now he was proposing a new tour and travel program to increase traffic to the casino-and incidentally, generate a third stream of income for himself personally.

While the internal auditor participating in the meeting had been summoned on a narrow agenda-to recommend controls for the proposed business-he found himself feeling uneasy about the whole picture. Something did not seem right. With senior management's authorization, he teamed with forensic accounting investigators, and together they launched a discreet investigation that probed the accounts for which the vice president was responsible, both in the core casino business and in the related junket business.

The result was astonishing. The executive was stealing from the company in some 15 to 20 different ways. Some of the schemes were primitive. For example, by using inflated foreign exchange rates, he cheated to the tune of tens of thou- sands of dollars in his expense reports. In that particular scheme, he made a mis- take that should have been detected much earlier: the exchange rates he reported were preprinted on the forms he used, but foreign exchange rates vary over time. Other schemes were sophisticated. Because he had significant influence over casino credit-granting and credit write-off decisions, he was able to put credit in the hands of people who were in reality not creditworthy and then authorize the write-offs, which amounted over time to many millions of dollars. The investi- gation did not prove whether he had profited directly from that process, but all indications were that he had. In the junket business, he also had a lucrative scheme under way, which involved buying airline tickets for his customers at the highest possible price, collecting the 10 percent travel agency commission, and then billing through to the casino company the full value of the ticket. This pat- tern, like much else, was undisclosed.

There was much more. This individual was a true maestro of fraud. For exam- ple, he had fraudulently arranged for the casino to pay the salary and benefits of the personnel working in his travel agency. He was billing the casino for house- keeping services at his own business offices and leasing for $12,000 a year- again, at the casino's expense-a desktop computer system that could have been purchased for $2,000. The lease was held by his outside accountant, who was also his landlord. And on and on-nearly everything he touched proved on investigation to have some element of fraud. The company's losses were at the level of many millions of dollars.

What became of him? He was not immediately terminated, because the state division of gaming enforcement had been conducting its own covert investiga- tion and wanted to follow his movements while imperceptibly restricting his ability to perpetrate further fraud. For this reason, the state authorities chose the time of his dismissal. He actually went on to enjoy 15 minutes of notoriety when he was called to testify before a Senate committee investigating infiltration by foreign mafias into the U.S. gaming industry. The internal auditors at the com- pany wound up their work by calculating that for every dollar of revenue this man had brought to the casino door through legitimate marketing activities, he had cost the company $1.07 million. It is worth noting that this consummate fraudster fit the profile of the white-collar criminal described in Chapter 3. He resembled any number of executives you might see walking down the streets of any major financial district. It could have taken many more years to expose him if the senior internal auditor called in to discuss controls had not felt uneasy as he listened. This was a victory for professional skepticism and experience.

Required -

1- Give a brief description about the selected case.

2- Name red flags found in each case.

3- Classify found red flags according to the fraud triangle.

4- Give your recommendations to avoid such fraud in the future.