Problem
Mikos Frederick, an immigrant from Ukraine, is a hotel owner in Las Vegas. Since his arrival in America during the 1960s, Frederick has built a very successful and popular hotel. Until recently, the hotel averaged $20 million in total revenue per year. Lately though, there have been rumors that Frederick’s hotel, the Russian Roulette, may be suffering unusual losses.
Recently, several of Frederick’s key staff have quit, complaining about low wages and nonexistent benefits. In fact, the hotel’s main attraction, its popular restaurant chef Alec Klarinko, quit as well as the hotel’s headlining performer.
While Frederick focused on coming up with a new compensation policy, he hired CPA Tony Slinko to look into the hotel’s diminishing cash flows. The first thing Tony did was head for the kitchen to partake of the award-winning food. The new chef, Jim Smoot, wasn’t what Tony expected. First of all, he wasn’t Russian, as most of the employees seemed to be, and second he refused to talk about why he had come to the Russian Roulette when so many wanted to leave.
After his visit to the kitchen, Tony began sifting through the accounting documentation looking for possible fraud symptoms. Tony reasoned that if employees felt like they weren’t being compensated accordingly, they may be apt to defraud the hotel.
Questions
1. Could Tony be right? Are employees defrauding the company, or has the Russian Roulette finally bit the bullet?
2. What possible fraud activities are associated with declining cash flows?