Fraud Report

Fraud Report: Colson Corporation

This documented report includes the preliminary findings of Barthelus & Barthelus, an independent auditing firm, contracted on January 12 2012 by Colson Corporation to review financial statements for the year ending December 31, 2011.Our preliminary findings show Colson Corporation to be in violation of multiple Generally Accepted Accounting Principles. Colson's violations include, but are not limited to: inflated leases on the company's technology assets, understatement of e-Commerce state tax payments, post-employment benefits for employees that were never employed by Colson Corporation, hidden cash from financing investments to cover failing quarters, and concealment of inventory shrinkage due to loss or theft. Included in this report will be the detailed violated GAAP rule, consequences the company could face for committing the violations, Barthelus & Barthelus recommendations for correcting the violations, and suggestions to help prevent these violations from occurring again in the future.

Inflated Technology Leases

After closely reviewing Colson's financial statements it was discovered that the company was in violation of Statement No. 27, which requires a lessor to classify a renewal or an extension of a sales-type or direct financing lease as a sales-type lease if the lease would otherwise qualify as a sales-type lease and the renewal or extension occurs at or near the end of the lease term. If the renewal or extension occurs at other times during the lease term, the prohibition in Statement No. 13 against classifying the renewal or extension as a sales-type lease continues in effect. Furthermore, this Statement does not affect the classification of a lease that results from a change in the provisions of an existing lease or the accounting for changes in the provisions of a lease if those changes occur during the lease term. Barthelus & Barthelus found Colson Corporation to be in violation of this statement, because documentation shows that Colson increased prices on hundreds of their leased assets and instead of the company recognizing the increase over the remaining amount of time left on the leases, CFO Jerry Brown prepared Colson's documentation to recognize the entire increase during the quarter that the increase was imposed.

Statement No. 27 is a modification of Statement No. 13 - Accounting for Leases. Over the years Statement No. 13 has had modifications to various topics found within the statement so that financial documents would align with Generally Accepted Accounting Principles. Financial documentation for Colson was composed by the Finance Department and reviewed and revised by the company's CFO, Mr. Jerry Brown. It is our findings that Mr. Brown restated the information regarding the inflated leases. Due to Mr. Brown's actions, the company will suffer multiple consequences, which include but are not limited to fines and restatement of financial documents. Going forward it is the recommendation of Barthelus & Barthelus, that Colson Corporation implement internal controls that will eliminate review of financial documents by one individual. Financial documents should have a committee that reviews and then signs off on the documents and by doing this unethical decisions can be deterred and fraud can possibly be avoided.

e-Commerce State Taxes

The second fraudulent act found, also committed by Mr. Brown, was the understatement of e-commerce state tax payments. As stated by FAS Statement No. 109 "the objectives of accounting for income taxes are to recognize (a) the amount of taxes payable or refundable for the current year and (b) deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an enterprise's financial statements or tax returns". E-Commerce sales for the year ending December 31, 2011 totaled $645,000.00 and accounted for more than half of Colson Corporation's 2011 sales. Computation of state tax based on e-commerce sales should have been computed as $198,000.00, but based on Mr. Brown's computations, e-commerce earnings were disclosed as $496,000.00, resulting in state taxes being understated as $132,000.00.

Once again, due to Mr. Brown's actions, the company will have to pay the difference in the understated state tax, they will be fined and restatement of financial documents will have to be completed. As stated before, it is the corporation's responsibility to ensure that the proper internal controls are in place so that it does not experience fraudulent accusations due to unethical decisions made by one person. Review of financial statements should occur before multiple individuals within the organization. Checks and balances performed by multiple individuals always assist in deterring individuals from committing fraudulent acts that can be discovered.

Postemployment Benefits

FAS Statement No. 112 establishes accounting standards for employers who provide benefits to former or inactive employees after employment but before retirement (referred to in this Statement as postemployment benefits). Postemployment benefits are all types of benefits provided to former or inactive employees, their beneficiaries, and covered dependents. Those benefits include, but are not limited to, salary continuation, supplemental unemployment benefits, severance benefits, disability-related benefits (including workers' compensation), job training and counseling, and continuation of benefits such as health care benefits and life insurance coverage. Through our preliminary review of Colson Corporation's financial documents, it was discovered that fictitious employees were receiving salary continuation benefits. Colson is obviously in violation of this because the standard clearly states that those benefits are to only be paid to employees, beneficiaries, or covered dependents postemployment, so if the person was never employed at Colson Corporation, how could they receive postemployment benefits. Upon further review it appears that these employment documentation was submitted to Human Resources and approved by Mr. Brown and it is assumed that the payments that were being made by Colson Corporation to these former employees were somehow being rerouted to Mr. Brown. FAS No. 109 is well stated and does not leave room for misconstruing its purpose or intentions. If you are not a former employee, than you should not be receiving these benefits.

Mr. Brown's actions can definitely be considered embezzlement, and it is very likely that he will experience some form of legal ramifications for possibly receiving funds that he was not entitled to. As far as Colson Corporation is concerned, anything that