Fraudulent Reporting Memo
The purpose of this memo is to disclose fraudulent reporting I have found in the company’s financial information in relation to product costs. Direct costs of work from private clients are being included in the overhead costs of the company. This increases the total overhead cost that is allocated amongst clients cost of sales, including the Defense Department of the government.
The company has cost-plus contract with government in building and maintaining roads to military bases. In cost-plus contracts we are reimbursed for the direct costs and a portion of the overhead costs. The profit comes from a fixed percent of cost of sales that is added onto the direct and overhead costs as a markup. With the Defense Department, the allocated overhead of the sale is reimbursed and does not take away …show more content…
from the gross margin of the sale. In the company, this left the incentive to shift direct costs from private clients without cost-plus contracts to the overhead that is allocated to sales with the Defense Department. Decreasing direct costs lowers the cost of goods sold on private accounts, increasing the gross margin. In summary, this cost shift causes an increase income by overcharging the Defense department on overhead costs.
By including direct costs in overhead, our financial reporting is in direct violation of the matching principle of the Generally Accepted Accounting Principles. The company is not correctly matching expenses with the revenues that they provide. We are also in violation of the False Claims Act. This act protects governmental programs from any wrongful gains in transactions with individuals or businesses.
The penalties of violating the Generally Accepted Accounting Principles and the False Claims Act, can have a severe effect on our company.
The penalties of the False Claims Act are between $5,500 to $11,000 in civil penalties and three times the amount the company has overcharged in damages. If changes are not made, the next external audit may find these mistakes and report a lack of compliance with Generally Accepted Accounting Principles. This would cause our customers to learn about this fraud from a source other than the company. This will cause irreversible effect on our reputation with our current and prospect clients.
Suggested solutions to the problem are to first investigate internally to find the employees involved in the fraud. Then disclose the information to our clients to avoid extra damage both legally and with our company’s reputation. Finally, strengthen the internal controls to protect against future opportunities for fraud, specifically under financial reporting.
Overcharging the government by overstating overhead with direct cost of private account is considered fraud. The problem needs to be addressed before any further damage is done to the
company.
The company has cost-plus contract with government in building and maintaining roads to military bases. In cost-plus contracts we are reimbursed for the direct costs and a portion of the overhead costs. The profit comes from a fixed percent of cost of sales that is added onto the direct and overhead costs as a markup. With the Defense Department, the allocated overhead of the sale is reimbursed and does not take away …show more content…
from the gross margin of the sale. In the company, this left the incentive to shift direct costs from private clients without cost-plus contracts to the overhead that is allocated to sales with the Defense Department. Decreasing direct costs lowers the cost of goods sold on private accounts, increasing the gross margin. In summary, this cost shift causes an increase income by overcharging the Defense department on overhead costs.
By including direct costs in overhead, our financial reporting is in direct violation of the matching principle of the Generally Accepted Accounting Principles. The company is not correctly matching expenses with the revenues that they provide. We are also in violation of the False Claims Act. This act protects governmental programs from any wrongful gains in transactions with individuals or businesses.
The penalties of violating the Generally Accepted Accounting Principles and the False Claims Act, can have a severe effect on our company.
The penalties of the False Claims Act are between $5,500 to $11,000 in civil penalties and three times the amount the company has overcharged in damages. If changes are not made, the next external audit may find these mistakes and report a lack of compliance with Generally Accepted Accounting Principles. This would cause our customers to learn about this fraud from a source other than the company. This will cause irreversible effect on our reputation with our current and prospect clients.
Suggested solutions to the problem are to first investigate internally to find the employees involved in the fraud. Then disclose the information to our clients to avoid extra damage both legally and with our company’s reputation. Finally, strengthen the internal controls to protect against future opportunities for fraud, specifically under financial reporting.
Overcharging the government by overstating overhead with direct cost of private account is considered fraud. The problem needs to be addressed before any further damage is done to the
company.