Starbucks Red Flags of Fraud

Starbucks Coffee Company Stephanie Deacon Colorado Technical University On course of study ACCT 320-1203A-01 prof White 6 August 2012 Abstract This paper leave alone bid an overview of Starbucks Coffee Company and identify seven trigger-happy iriss of possible double-tongued behavior indoors the organization. Steps to design a blind streak course will alike be discussed based on the set ruddy ease ups. Starbucks Coffee Company opened its first store in Seattle, Washington in 1971 offering fresh-roasted whole bean umber beans. Howard Schultz (Starbucks chairman, president and foreland administrator officer) joined Starbucks in 1982 as director of retail operations and securities industrying. Starbucks begins providing coffee to fine restaurants and espresso bars (Starbucks, 2012). In 1985, Howard founds Il Giornale, offering brewed coffee and espresso beverages made from Starbucks coffee beans (Starbucks, 2012). Two yrs later Howard Schultz purchases Starbucks assets with the help of visorical anaesthetic investors and Il Giornale changes its name to Starbucks Corporation and stores open in Chicago and Vancouver, Canada increase the total number of stores to 17.Starbucks currently has over 16,000 stores in 50 countries and considers the society the premier roaster and retailer of specialty coffee in the world (Starbucks, 2012). Starbucks bursting charge statement is to inspire and nurture the human spirit- iodin person, one cup, and one neighborhood at a time (Starbucks, 2012). Starbucks refers to their employees as partners and their focus is to create a work devote that prizes and respects pot from diverse backgrounds and to conduct demarcation in an respect able manner.Starbucks has a business and ethics compliance program in place to help ensure that completely employees make estimable decisions in the workplace. In addition to its retail outlets, the Starbucks brand of gourmet coffees, wangle to drink Frappuccino and double sho t drinks and ice creams atomic number 18 withal interchange in grocery and convenience store outlets. Starbucks total net tax incomes as of fiscal year ending Oct 2, 2011 was $11,700. 4 (in millions) which was an increase from both 2010 fiscal year end of $10,707. 4 and $9,774. 6 from 2009 respectively (Starbucks Annual Report, 2012).As of 3 quarters ended July 1, 2012, Starbucks un visited net revenue was $9,935. 4 (millions), up from $8,668. 7 from July 3, 2011. Seven departure flags of possible fraud Starbucks appears to have a near tone at the conduce with its established core values yet there can be instances of fraud going un key outed by the auditors due to steerings override of controls. For example, with concerns about competition in the market, amphetamine centering could engage in creating fictitious revenues to make Starbucks understand as if the come with was performing better than it actually is. McDonalds 2011 one-year revenues were $27. 1 billion (Hoove rs, 2012) in comparison to Starbucks $11. 70 billion and since McDonalds introduced the McCafe line in 2009 to compete with Starbucks, it has captured a sizeable portion of the coffee drinkers market. According to Keith OBrien from the New York Times, beverages, thanks to smoothies and espresso drinks, argon now a $9 billion annual business for McDonalds in the United States (OBrien 2012). This type of competition could pressure Starbucks management to wallow the federations earnings and one key atomic number 18a where this could be accomplished is with improper revenue credit entry.Starbucks sells store valued gift tease called Starbucks cards where customers load money on the cards for future example in any participating Starbucks location. Revenues fromstored value cards, primarily Starbucks Cards, are know when redeemed, or when we recognize breakage income (Starbucks Annual Report, 2011). Breakage income is typically accept when the redemption of the cards is likely to be remote based on past history. Outstanding card balances are included in deferred revenue on the balance sheet.Management could record this deferred revenue on the income statement kind of at year end, thus turning a potentially sluttish quarter into a much stronger one. Revenue recognition has a intricate impact on a companys income statement, and not adhering to revenue recognition criteria could result in overstating revenue and net income in one coverage period and understating revenue and net income in a resultant period (Spiceland, Sepe, & Nelson, 2011, p. 30). Typically, a senior executive who is inclined to cook the books possesses ow ethical standards, though this trait may often be difficult to detect prior to the commission of a crime (White Collar Crime Fighter, n. d. ). some other red flag would be management unwilling to provide pass along material to auditors, such as financial announces for cultism they will display the fraud. The second area of concern for red flags of fraud would attribute to employee behavior. For instance, an employee who refuses to mint vacation or sick time could be engaging in deceitful activities.If an employee were embezzling from the company, he would refuse vacation or promotion for fear of detection (Hancox, n. d. ). Additional red flags to watch out for with employee behavior changes would be borrowing money from co-workers, excessive gambling or drinking, or vaunt about significant new purchases (Hancox, n. d. ). High employee turnover is another power of potential fraud especially in an area of the organization that is more vulnerable to fraud such as payroll.High employee turnover can in addition be attributed to low morale and this could be a red flag of abusive management who may be engaging in fraudulent activity and should not be overlooked. High turnover at the executive level of the company would also be a red flag forefinger that fraud might be occurring. natural controls related to r ecord encompass a large area ripe for fraud within Starbucks. Inventory deals with purchasing, receiving, shipping, processing and disbursements and if controls are overlooked it could seriously impact the companys financial health.For example, high volumes of purchases from new vendors could be a red flag for fraud as this could indicate a fictitious company has been created and goods could be shipped to a fake address then stolen. Another red flag would be purchasing agents that pick up vendor payments quite than have it mailed (Hancox, n. d. ). Unusual increase in the book value of gillyflower or slow inventory turnover could be a red flag for fraud. For example, Starbucks inventory for year end 2010 was $543. 3(millions) and $965. 8 for year end 2011 (Starbucks Annual Report, 2012).The COSO report indicated that about 50 percent of the canvas fraud companies overstated assets by recording fictitious assets or assets not owner or capitalized items that should have been expense dand the most commonly misstated asset was inventory (Rezaee & Riley, 2010, p. 101). Payroll is another area that can be highly liable(predicate) to fraud. A number of things to look for would be the personnel department reporting new hires or terminated employees to the payroll department to ensure that paychecks are going to the right people and that fictitious employees have not been created.Another bailiwick would be having pre-numbered checks and having the sequence checked. If this natural control is not in place then it is possible to issue checks that have not been recorded in the system. Payroll checks should alos be authorized by two persons signatures to ensure that unlicenced payments are not made as a result of delusion or fraud. The companys organizational expression could be an indicator of red flags for fraud. The first thing to look for would be the tone at the top of the company.Unethical business conduct by executives is a key red flag in addition to high tu rnover of top executives. A clear line of dominance is not present, irresponsible corporate governance, and extinct corporate code of conduct and a decentralized organization structure without adequate monitoring (Rezaee & Riley, 2010, p. 107). The corporate mission consists of maximizing profits and nought else. The audit committee is ineffective, inexperienced and not capable of performing their duties. pecuniary performance red flags could include unusual rapid growth during an constancy economic slump. Unexpected and sharp decreases in earnings or market share by the industry (Rezaee & Riley, 2010, p. 110). Adverse legal circumstances could also lead to fraudulent behavior. Starbucks is engaged in a court interview with kraft paper Foods alleging a material come apart of contract by Kraft and Starbucks dis move their distribution arrangement with Kraft as of March 1, 2011. On December 6, 2010, Kraft commenced a federal court action against Starbucks, authorize Kraft Food s Global, Inc. v. Starbucks Corporation, in the U. S. soil Court for the Southern District of New York (the District Court) seeking injunctive relief to prevent Starbucks from terminating the distribution arrangement until the parties repugn is resolved through the arbitration proceeding (Starbucks Annual Report, 2012). The injunction was denied and Starbucks has since hold control of their packaged coffee distribution. Starbucks is unsure of the financial damage that the breach by Kraft has caused and will most likely be able to estimate the damages in mid-2012. Fraud Prevention Program It is the organizations responsibleness to create a culture of honesty and high ethics and to clearly communicate acceptable behavior and expectations of each employee (AICPA, 2012). The tone at the top of Starbucks must consist of honorable, honest people with high integrity, and committed to competence as they set the example. Having strong core values at the top of the company and sharing th ose values throughout the organization will army Starbucks employees how the company operates. The board of directors and audit committee must be skilled, meliorate and qualified to perform their duties such as auditors having a CPA license.Roles of authority and responsibility must be clearly defined. Starbucks should have a soupcon telephone line established so that employees can confidentially report any violations of the code of conduct, suspected fraud or ethics violations. The integrity, ethical values and competence of Starbucks employees managements philosophy and operating style of the organization will help reinforce the companys culture as a strength and not a weakness. Internal control is not plainly documented by policy manuals and forms. Rather, it is put in by people at every level of an organization (COSO, 2011).Policies and procedures covering financial and useable activities in place at Starbucks must be adhered to by employees at every level of the company to ensure the company is being maneuver effectively and efficiently. For example, the procedures may encompass a range of manual and modify activities such as authorizations and approvals, verifications, reconciliations, and business performance reviews (COSO, 2011). Information processing controls, sensual controls and segregation of duties should also be in place to ensure that risks are mitigated so Starbucks can meet its objectives.Management should create a prescribed work surround with good hiring, training and promotion practices to ensure all employees are capable of performing their jobs. Research results indicate that wrongdoing occurs little frequently when employees have positive feelings about an entity than when they feel abused, threatened, or do by (AICPA, 2012). Creating a team-oriented environment where employees are involved in the decision-making process, positive feedback from management, recognition for good job performance and rewards for achievements all contribute to reducing the risks of fraud in the workplace.Effective communication of Starbucks objectives across the entire company is essential to its continued successful operations. Management must ensure that information is conveyed in a clear and understandable manner so the employees comprehend the importance of the natural control procedures and that they must be followed. Communication of information also includes communication with external parties regarding matters affecting the functioning of other components of internal control (COSO, 2011).Starbucks upper management must monitor the control activities and confirm the effectiveness of its internal controls. Manual and ongoing evaluations monitor the internal control process activities throughout the normal dad-to-day operation of the company. Ongoing evaluations are generally performed by line operating or functional managers who are competent and have commensurate knowledge to understand what is being evaluated and considering the implications of information they receive (COSO, 2011).If the controls are inadequate, management must immediately communicate this information to the responsible party in order to take immediate action and employ corrective measures to ensure that controls are being followed as intended. To effectively prevent or admonish fraud, an entity should have an appropriate oversight function in place (AICPA, 2012). An audit committee can strengthen a weak company environment by assessing the fraud risks identified by Starbucks management, evaluate the companys anti-fraud policies and ensure that the tone at the top is conducting business with the highest level of integrity.Oversight by the audit committee helps to ensure that senior management fulfills its responsibility, but also can serve as a deterrent to senior management engaging in fraudulent activity (AICPA, 2012). References AICPA. (2012). AU Section 316 musing of Fraud in a fiscal Statement Audit. Retrieved from h ttp//www. aicpa. org/Research/Standards/AuditAttest/DownloadableDocuments/AU-00316. pdf COSO. (2011). Internal Control-Integrated Framework. Retrieved from http//www. coso. org/documents/coso_framework_body_v6. pdf COSO. (2011).Committee of Sponsoring Organizations of the Treadway Commission About us. Retrieved from http//www. coso. org/aboutus. htm Hancox, S. (n. d. ) Red Flags for Fraud. Retrieved from http//www. osc. state. ny. us/localgov/pubs/red_flags_fraud. pdf Hoovers. (2012). Starbucks company overview. Retrieved from http//subscriber. hoovers. com/H/company360/overview. hypertext markup language? companyId=15745000000000 OBrien, K. (2012). How McDonalds Came Back Bigger Than Ever. Retrieved from http//www. nytimes. com/2012/05/06/magazine/how-mcdonalds-came-back-bigger-than-ever. html? r=1&pagewanted=all Rezaee, Z. , & Riley, R. Financial Statement Fraud Prevention and contracting (2nd ed. ). John Wiley & Sons Inc. Hoboken New Jersey. Starbucks. (2012). Starbucks Annual R eport. Retrieved from http//investor. starbucks. com/phoenix. zhtml? c=99518&p=irol-irhome White-Collar Crime. (n. d. ) Financial Statement Fraud Detecting the Red Flags. Retrieved f http//www. wccfighter. com/FinancialStatementFraudRedFlags. html . . Spiceland, J. D. , Sepe, J. F. , & Nelson, M. W. (2011). mediocre Accounting. New York McGraw-Hill/Irwin.