Case Analysis 1

Case Analysis

American Food Suppliers Inc.: A Case Study in Fraud and Forensic Accounting

Student Name

Student Affiliation

Date
Case Analysis 2

The case is about the accounting irregularities and fraud in the American Food Suppliers Inc.

as a result of which the auditors of Barnacle, the company which acquired American Food

Suppliers in 2000, suspended their audit upon finding the fraud of $900 million.

Symptoms: The decrease in sales activity of the association led to a number of problems.

The symptoms which led to the disclosure of this fraud were the overstated and unrealistic

statements of vendor rebate receivable. A tremendous increase in the supplier rebates from

150 million dollars to 800 million dollars was seen in the span of just 4 years. The stock

prices of the company faced a strong leap, investigations for accounting regulations were

carried out in the company, employee turnover rate increased especially for the upper

management, and officials of the company were accused of the crime of public fraud.

Problem Statement: The main problem that gave rise to the series of the above mentioned

was the flawed decision of the upper management to purchase excess amount of inventories.

Moreover, the forged vendor rebate receivables statements resulted into the criminal

convictions on the management officials.

Problem Analysis The excess purchases of the inventories not only led to the increased

demand of warehouses and refrigerators but also compelled the company to sell products at

low prices in order to free up space. The most prominent weakness of American Food

Suppliers Inc. was the strategic and business approach of its upper management. They lacked

long-term vision, values of business ethics, and the awareness of the consequences of their

decisions. Instead of filling the inventories with excess goods for achieving handsome

receivables in the form of vendor rebates, the company went for increasing the sales by

increasing quality and by pursing customer-driven business strategies. The criminal

allegations further posed a great threat to the credibility of the company. The company,

instead of focusing on its strengths, such as competitive position, reliability, customer base,
Case Analysis 3

and product quality, selected a way of boosting sales which was risky and unethical

(Valentin, 2001). In scenarios, in which a company faces reduction in its sales and profits, it

is important to pinpoint the major threats that are coming in the way of profitability. The

focus should be on reducing those threats and creating opportunities for success. Ratio

analysis technique could have been used to compare the performance of American Food

Suppliers Inc. with other competitors (Nissim and Penman, 2001). This could have been

beneficial for revealing important information regarding productivity, liquidity, and the

operational competence. As far as the audit is concerned, the auditors trusted the third party

confirmations which led to the false financial statements and hence to this entire incident of

fraud.

Recommendations: A better approach in this scenario is been to focus on the needs of the

customer and to follow the trends of the market. Ditching the old business plan and devising

a new one with the up-to-date requirements of the industry is a good approach to increase the

sales. The auditors must build direct connections with the vendors in order to avoid legal

issues. Haste is never good for long-term success and sales improvement is a time taking

process. Therefore, the officials must focus on building credibility instead of finding

shortcuts.

References
Case Analysis 4

Nissim, D., & Penman, S. H. (2001). Ratio analysis and equity valuation: From research to

practice. Review of accounting studies, 6(1), 109-154.

Valentin, E. K. (2001). SWOT analysis from a resource-based view. Journal of marketing

theory and practice, 9(2), 54-69.