Executive Summary
In this company fraud evaluative report, the author focused on Just for Feet Inc. The company started operations in 1977. However, cases of fraud led to its closure in 2004. The fraud included the provision of misleading and inaccurate financial records. Other instances included fictitious rebate receivables, invented co-op revenue, non-existent booth income, and inflated inventory. The affected stakeholders included Kelvin Pfeiffer, Antonio Molendez, and the employees. The fraud could have been averted by putting in place internal control mechanisms and engaging honest external auditors.
Introduction
Fraud is the planned deception carried out by a person or an entity for illegal gains (Barclift 288). Governments around the world have put in place legislation to make sure that business persons within their jurisdictions do not engage in this crime. Fraud may lead to, among others, the collapse of a company.
In this report, the author will analyze the fraud that led to the collapse of Just for Feet Inc. To this end, the author will provide a brief history of the company, an analysis of the role of the auditors in the fraud, and a review of internal controls that were ignored by the perpetrators of the crime. Finally, the author will identify accounting policies that are designed to avert such a scenario in the future.
Just for Feet Inc.: An Analysis of the Fraud
A Brief History of Just for Feet Inc.
The company was started in 1977. It focused on the distribution of athletic and sportswear. It became one of the largest companies in the country’s sportswear sector. The firm closed down in 2004 (“Complaint about Injunctive and Other Relief” 6). Its collapse was brought about by fraud. The firm operated more than 140 outlets in 25 states. In addition to sportswear, the stores owned by the company provided the shoppers with a wide range of entertainment features (Barker et al. 56). The company was managed by Harold Rotenberg.
The Role Played by the Auditors in the Fraud
The cases of fraud reported in the company included fictitious Rogers rebate receivables (“Complaint about Injunctive and Other Relief” 19). The auditors increased the revenue of the company through the creation of false and fraudulent receivables. Rogers was contracted as Just for Feet’s outside advertising agency. The auditors also allowed the company to mislead the public through the establishment of fictitious co-op revenue (Whittington and Pany 45). The vendors were allowed to offer ‘written’ financial assistance. As a result, the company shared the proceeds made from selling a given product with these individuals (Whittington and Pany 99).
Auditors are expected to adhere to a number of rules when dealing with a business organization (Wood et al. 123). One of the standards entails the provision of accurate financial records. However, the auditors at Just for Feet failed to adhere to this provision in their dealings with Just for Feet Inc. A case in point is the company’s balance sheet as of January 30th, 1999. The document showed that the merchandise inventory held by the firm stood at $399.9 million. However, a review of the company’s records showed that this figure was inflated by almost 100%. The actual figure was $206.1 million (“Complaint about Injunctive and Other Relief” 17).
Another fraud that the auditors helped the company to perpetrate entailed the provision of fictitious booth income (Barclift 280). At the beginning of December 1996, a group of defendants sent vendors’ bills to the firm. They included, among others, Tyra and Wynne (“Complaint about Injunctive and Other Relief” 45). The vendors had not incurred any expenses in placing the display booths at the company’s outlets.
Internal Controls that were Ignored
The firm could have put in place internal controls to deal with the fictitious Rogers rebate receivables. For example, the organization should have provided the actual figures regarding its assets and earnings (Biegelman and Bartow 45). With regards to fictitious co-op revenue, the company should not have offset the figure against its expense statement to increase its net earnings. The problem of excess inventory could have been solved by the defendants. They should have made adjustments to the company’s stock using the figures from the previous fiscal year (Wood et al. 44).
Proposed Solutions
A number of strategies could have been adopted by the management to avert the closure of the company. One probable solution entails understanding the employees working for the firm (Wood et al. 24). A critical analysis of the case reveals that the company lacked information about its workforce. Another strategy is to inform employees about existing reporting systems (Barclift 300). As a result, whistleblowers will know who to contact in case of fraud. The workers should also be made aware of the company’s fraud policy. The policy should highlight the different types of fraud and the risks associated with them. The people working for Just for Feet Inc. appeared to lack this information.
Another internal control strategy that should have been used by Just for Feet Inc. includes monitoring ‘vacation balance’. In addition, rotation of employees within the company is another strategy that could have averted the fraud (Whittington and Pany 129).
Conclusion
The analysis above reveals that poor management and other shortcomings led to the fraud that resulted in the collapse of Just for Feet Inc. The employees and the management were engaged in acts that contravened anti-fraud legislation in the US. The auditors also covered up for the company. They failed to report the discrepancies in the firm’s financial records.
Works Cited
Barclift, Jill. “Scheme Liability and Common-Law Fraud Under State Law: Holding Corporate Officers and their Co-Conspirators Accountable to Shareholders.” Thomas M. Cooley Law Review 26.2 (2009): 273-305. Print.
Barker, Emily, Brian Baxter, Alison Frankel, and Nate Raymond. “Progress Report: How the Justice Department’s 440 Highest-Profile Corporate Fraud Cases Turned Out.” Federal Sentencing Reporter 20.3 (2008). 206-210. Print.
Biegelman, Martin, and Joel Bartow. Executive Roadmap to Fraud Prevention and Internal Control: Creating a Culture of Compliance. 2nd ed. New York: John Wiley & Sons, 2012. Print.
Complaint about Injunctive and Other Relief2004. PDF file. Web.
Whittington, Ray, and Kurt Pany. Principles of Auditing and Other Assurance Services. 19th ed. New York: McGraw-Hill Irwin, 2013. Print.
Wood, Donna, Jeanne Logsdon, Patsy Lewellyn, and Kimberly Davenport. Global Business Citizenship: A Transformative Framework for Ethics and Sustainable Capitalism. London: Routledge, 2006. Print.