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Lots of Books, Inc.

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leslie maley

on 19 December 2013

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Transcript of Lots of Books, Inc.

Collection of Evidence
Email Reviews
Manual Journal Entries
Chris Anderson's Expense Report
Monthly Sales Report
Interview Transcripts
Expense Reimbursement Fraud
Improper Sales Recognition
Why we were hired
Allegations were formed against Lots of Books, Inc. regarding earnings management. Their law firm Bacon, Baker, and Barnes, LLP contacted our firm for guidance. We assessed the validity of the allegations by evaluating evidence, interviews, and the data analysis.
Foreign Corrupt Practices Act
Lots of Books, Inc.
Ratio Analysis
Red Flags
Red Flags
Evidential Support
Key Suspects
Red Flags
Sales are recorded before they earned or realizable.
Increases in sales, especially in last period.
Increases in returns of merchandise, accompanied with sales credits, especially in early days of new quarter or new fiscal year.
Pressure to increase sales and meet market expectations.
Evidential Support
Key Suspects
Evidential Support
Key Suspects
E-mail review of Ellen Wollstonecraft, SVP of Sales
Discussion with member of the Seattle office about strategy that he is not comfortable sharing with everyone.
Mention of pressures from Keaton to meet numbers.
There is a new clause in customer contracts that offers rebates for bulk ordering.
New "time specific" return policy that tells customers to return excess books at the end of the quarters.
Exhibit D, Anonymous Letter
Receiving books back from customers and improperly recording them as "damaged" books. These books are then sold to customers at a very low price.
Accounting records may not be accurate.

Month-to-Month Sales Analysis
Shows peak in sales at the end of each quarter, and a peak in returns right after.
SEC Letter of Inquiry to the CFO
Has been major increases in LOBI's sales reserves.
Manual J/E on 7/11/2005
"Damaged" goods should not be put back into regular inventory. There should be an inventory write-down instead.
Ellen Wollstonecraft, SVP of Sales
Introduced new policies to customers and sales managers.
Matt Carrol (Seattle)

Introduced new return and rebate policies, which are being used in Seattle, to Ellen.
Rick Miller, Senior Manager - Operations
E-mails with Ellen discussing new return policy and how the boost in sales would impress Keating.
Alicia Cisneros, Chief Operating Officer
At first seem worried about the increase in returns, but was convinced once she learned how the policy would increase sales.
Dealings with a country that has a reputation for corruption and bribery.
Lack of paper documentation and records for the expenses.
Payments charged to general purpose or miscellaneous accounts that can be used to hide improper payments.
Bloomberg Article, November 21, 2013
China ranked 80th out of 176 countries for the perception of public sector corruption.

Chris Anderson Expense Report
55% of expenses related to the Asia-Pacific expansion did not have receipts.
Multiple charges to meals, transportation and entertainment.

Chris Anderson Interview Transcript
Meeting expense contained meals and drink charges.

Emails between Peter Keating and Chris Anderson about $90,000 in cash advances.
Chris Anderson, VP of Asia-Pacific
Expense report, interview, and emails with Peter Keating reflect suspicious behavior related to the FCPA.
Peter Keating, Chief Executive Officer
His "get things done" attitude pressures employees to meet expectations at any cost.
Turns a "blind-eye" to Chris Anderson's cash advancement requests.
Beneish M-Score
Manual Journal Entries
$1,303 expense reimbursement for Chris Anderson, VP of Asia-Pacific on 5/14/200 (no receipts)
$3,010 expense reimbursement for Chris Anderson on 7/14/2005 (no receipts)
Expense reimbursement forms for April-July, 2005 for Chris Anderson
$41,086 of the expenses do not have receipts (55% of total expenses).
Largest expense without receipts in each month is claimed as "meeting"
Rebecca Wharton's 8/2/2005 e-mail to Chris Anderson
Confirms total of $75, 653 was spent regarding the joint venture contract with Chinese firm

Missing or altered documentation of expenses
Above average reimbursement expense
Chris Anderson
Submitted expense reimbursement reports that lacked documentation for certain expenses.
Full transcript