Case Study : Street Smart
Street Smart was Information Technology firm founded in Mysore. The founders were two businessmen who had made a killing in the Bangalore Real Estate Business. The firm appeared to be doing well. It had campuses in most of the IT towns in India – Mysore, Bengaluru, Chennai, Hyderabad, Pune etc
The headcount of software engineers had crossed 10,000 in four years. The founders were Mr A. Reddy and Mr H Reddy. They were brothers. After the establishment of the IT business, Mr H Reddy was managing it whereas Mr A Reddy continued to manage the Real Estate Business.
When Street Smart was being formed, the Reddy brothers had met Prof Narsimhan who was a professor in a well-known Institute of Management in Southern India. Dr Narsimhan had just returned from a long stint in USA and decided to invest a sizable amount in the firm. Dr Narsimhan was a board member but did not look into day to day operations of the firm. He spent his time and energy in Teaching and Research.
Dr Narsimhan was the professor, whom you looked up to during your MBA studies at the Institute. You have graduated this year and will join a consulting firm next month. When you meet the professor, he asks you to come to his chamber saying it is confidential and urgent.
Dr Narsimhan tells you that he is prominent shareholder and a director in Street Smart IT firm. Your mental maths immediately put the Professor as a multi-millionaire on account of this. He said ‘ I am going to tell you something highly confidential in the hope that you would do a job for me. It should not take more than a week”
Sure Professor, you say.
Please keep this highly confidential. We will all be in trouble if the information leaks out.
You can trust me Professor. Mum is the word. Not sharing with anyone. Not even my girlfriend.
OK, some of my confidantes in Street Smart have just told me that all is not well there. There is some manipulation in two accounts – Atlantic Oil and Canadian Maple.
Can you look into these two Customers Accounts? Check the invoices and receipts and see if everything is reconciled and matching. I am particularly concerned about the Atlantic Oil account because my confidante has information that the firm made huge losses in executing that order.
I will tell Narayan (the chief accountant at Street Smart) that you are my research assistant and we are writing a case on accounts receivables. I will tell him to give you all possible help.
I will give the names of 5 customers. Use the cover of making a case study and go to the bottom of all 5 customers. But I am interested in only the two I have mentioned. Can you start Monday?
On Monday you met Chief Accountant and his assistant Mr Eashwar. The Chief Accountant was expecting you. He pointed at Eashwar and said “If you want any documents just ask him”
You made a show of looking into the first two accounts. Then you ask Eashwar to bring the accounts statement for Canadian Maple.
You tabulate the following sales data.
You ask for the SBI and HDFC bank ledgers and notice the payment received in the respective accounts. You further notice a peculiar oddity about the payments. They are bank transfers from two different banks. This seems to be true for all the payments in 2018 and 2019.
$ 2.5 million in 2018 and $ 2.2 million in 2019 was transferred from Bank ABC whereas the rest of it was transferred from Bank XYZ. Bank ABC appears to be Halifax Bank Canada whereas XYZ appears to be Bank of Bahamas Ltd.
It seems strange. Just when you were to close the Bank statement file, an entry within the same week strikes you. The entire payment seems to have been withdrawn in Cash!! You ask Eashwar about the withdrawal. He confirms that there was a cash withdrawal. A friend of Mr H Reddy controlled the Seven Tombs Cooperative Society Bank and needed some deposits. Hence the amount was withdrawn in cash and deposited in the Seven Toombs Bank. You ask for that Bank statement and Mr Eashwar says we do not have a bank account there but the amount was deposited in a Fixed (Time) Deposit. Mr Eashwar further shows the Fixed (Time) Deposit receipts to you.
You could sense that there seemed to be an anomaly but cannot figure it out. The track from Sales Invoices to Payment receipts to money in the Bank seemed complete.
Setting it aside for further analysis, you ask for the statement for Atlantic Oil. After searching for a while Mr Eashwar returns perplexed and says that there is no customer by that name. There were no invoices or payments from that party.
You ask Mr Eashwar if the firm reconciles cash ledger and bank account statements. Mr Eashwar says we do it every fortnight. We did the reconciliation on Friday and it was tallying.
You call up Mr Narsimhan and inform him of your findings. He said that his informer was very confident of the manipulation and asked you to dig deeper and be more thorough.
What should be your next steps?
The next step should involve a thorough investigation into the financial discrepancies and irregularities you have discovered, particularly regarding the Canadian Maple account and the missing Atlantic Oil account. Here’s what you should do:
- Examine Canadian Maple Account:
- Review all the sales data and payment records related to Canadian Maple for 2017, 2018, and 2019.
- Verify the payment details, including bank transfers from Halifax Bank Canada (Bank ABC) and Bank of Bahamas Ltd (Bank XYZ).
- Investigate the cash withdrawal of $2.5 million in 2018 and $2.2 million in 2019, as well as the subsequent deposit in the Seven Tombs Cooperative Society Bank.
- Obtain the Fixed (Time) Deposit receipts for the deposited cash and examine them closely.
- Reconcile Cash Ledger and Bank Statements:
- Review the firm’s cash ledger and bank account statements, with a focus on the entries related to the Canadian Maple account.
- Ensure that there is consistency between the cash ledger, bank statements, and payment receipts.
- Search for Atlantic Oil Account:
- Investigate the missing Atlantic Oil account. Since there are no invoices or payments recorded, it’s essential to determine if the account exists or if it has been intentionally concealed.
- Verify with other departments or individuals if they have any information on the Atlantic Oil account.
- Interview Key Personnel:
- Talk to Mr. Eashwar, the assistant to the Chief Accountant, for more details on the Canadian Maple account, the cash withdrawal, and the deposit in the Seven Tombs Cooperative Society Bank.
- Speak with the Chief Accountant for further information on the financial records and reconciliation processes.
- Request Documents and Records:
- Obtain copies of all relevant documents, including invoices, bank statements, payment receipts, Fixed (Time) Deposit receipts, and any other financial records related to Canadian Maple and Atlantic Oil.
- Consult with Prof. Narsimhan:
- Keep Prof. Narsimhan informed of your ongoing investigation and share your findings with him regularly.
- Seek his guidance and advice on how to proceed, as he has a vested interest in resolving the discrepancies.
- Perform a Comprehensive Financial Audit:
- Consider conducting a comprehensive financial audit of Street Smart to ensure the accuracy and integrity of its financial records.
- Look for any additional irregularities or discrepancies in other customer accounts and financial transactions.
- Maintain Confidentiality:
- As Prof. Narsimhan emphasized, keep all information and findings confidential to avoid potential repercussions for the company and its stakeholders.
- Report Findings:
- Once your investigation is complete, provide a detailed report to Prof. Narsimhan, including any evidence of financial manipulation, discrepancies, or irregularities.
- Follow any further instructions or actions as directed by Prof. Narsimhan.
Your primary goal should be to determine whether there is any financial misconduct within Street Smart, specifically in the case of the Canadian Maple account, and to unravel the mystery surrounding the missing Atlantic Oil account