Real-Life Math -- Solution
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.
So
in Year 1, Serendipity Inc. had a margin of 8/10 or 80 percent.
In
Year 2, it had a margin of 10/14 or 71 percent.
In Year 3, it had a
margin of 14/18 or 78 percent.
The average margin between the first
and third years was:
(80 + 71 + 78) / 3 = 76.3 percent
A
company in the same business and similar in size has an average margin of
35 percent -- less than half the amount of Serendipity Inc.!
So alarm
bells start going off.
You take a closer look at the financial statements
of the two associated companies and you put the financial statement of Serendipity
Inc. right beside them.
| Serendipity Ltd. | Serendipity Co. | Serendipity Inc. |
| Sales | 4 | 6 | 18 |
| Expenses | 6 | 18 | 4 |
| Net Income | (2) | (12) | 14 |
The net income of the three companies combined is ZERO.
The two companies that have been "losing" money were not insured. (Ding-dong,
those bells are really going off now!)
The owners were transferring
the losses (or 0 profit) to the other companies and showing a fraudulent level
of profit in the insured company.
You've solved the case!
If
the insurance company had paid out, the owners would have received loss of
profit compensation for a company that wasn't making any money at all.
Forensic
accountants need to be comfortable with numbers in order to solve problems
like the one above. But other skills are even more important.
"I
know when I majored in accounting, I thought, 'I like math -- I'll major in
accounting,' and certainly math is part of it," says James Bierstaker. He
teaches auditing at Villanova University.
"But I think ... it's more
the analytical skills [that are important]," says Bierstaker. "It's being
able to take a set of financial statements and sort of tear them apart and
analyze the numbers and be able to look at ratios and look for trends. It's
more the analytical side."