Real-Life Math
Often, forensic accountants are only shown pieces of a picture,
and they seem to tell you everything is clear and above board. But if you
can get hold of all the pieces, then a new picture can develop.
Try
out your investigative techniques on this puzzle.
You have been hired
by an insurance company to assess the "loss of profit" claim submitted by
the company Serendipity Inc.
A fire destroyed their plant and they
are claiming a loss of profit of $14,000.
Here are excerpts from Serendipity
Inc.'s financial statements ($ in thousands):
| Year 1 | Year 2 | Year 3 |
| Sales | 10 | 14 | 18 |
| Expenses | 2 | 4 | 4 |
| Net Income | 8 | 10 | 14 |
Their net income is $14,000.
A similar-sized company in
the same market has an average margin of 35 percent.
The term "margin"
refers to net income and sales.
You do a little more investigating
and you discover that the people who own Serendipity Inc. also own Serendipity Ltd.
and Serendipity Co. -- neither of which are insured at all. The only
insured company is Serendipity Inc.
Here are excerpts from
last year's financial statements of Serendipity Ltd. and Serendipity Co. ($
in thousands):
| Serendipity Ltd. | Serendipity Co. |
| Sales | 4 | 6 |
| Expenses | 6 | 18 |
| Net Income | (2) | (12) |
You are becoming more and more suspicious, but all your suspicions
are coming from the gut.
To see if your suspicions are on the right
track, you have to calculate the average margin of Serendipity Inc. over the
last three years and compare it to the average margin of a similar
company.
If your suspicions are off base, you tell the insurance company
that the loss of profit claim is valid.
If your suspicions are on the
right track, you need more proof. So you have to analyze the financial statements
of Serendipity Ltd. and Serendipity Co., and compare them with the financial
statement of Serendipity Inc.
So what happens? Is the company's claim
valid or fraudulent?