Case Study Prompt
Aurora Electric Case Study
Aurora Electric has a contract with a Federal Government agency to provide electrical power for a five-year period. The contract requires power to be provided “at the lowest reasonable cost without compromising safety.”
Aurora Electric purchases coal from its wholly-owned subsidiary, Great Yukon Electric, for this contract—this sale represents 40% of Great Yukon Electric’s coal sales. During the contract, Great Yukon Electric earned an average profit of $1.2 million per year from these sales.
A former employee, Jed Williams, was terminated and subsequently filed a qui tam lawsuit, alleging that Aurora Electric intentionally overcharged the Federal Government during the contract period.
Assignment Question
In an appropriate level of detail, answer ONE of the following:
1. You are the Forensic Accountant for the whistleblower’s attorney.
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What are the accounting issues in this case?
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What are the (potential) damages in this case?
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What documents and other information would you intend to seek or request as part of your work for the attorney on this case?
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What is/would be the basis of your opinion on this case?
Instructions:
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Provide a thorough and detailed analysis.
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Address each part of the selected question directly and clearly.
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Use relevant accounting, auditing, and forensic investigation concepts.
The answer
Analysis of
Forensic Accounting: Aurora Electric Case Study
Accounting Issues in the Case
This case study investigates whether Aurora Electric
overcharged the federal government in violation of its contractual obligation,
through potentially inflated coal pricing with its subsidiary. The analysis is
based on forensic accounting principles and supports the whistleblower's claims
under the False Claims Act. In the Aurora Electric case, the primary accounting
question is whether the corporation fulfilled its obligation to supply
electricity at the "lowest reasonable cost without compromising safety."
Concerns over transfer pricing and possible cost inflation are raised by
Aurora's acquisition of coal from Great Yukon Electric, its wholly-owned
subsidiary. Given that this deal accounts for 40% of Great Yukon's coal sales
and generates an average yearly profit of $1.2 million, there is cause to
believe that the pricing were not established at arm's length. It's also
unclear if Aurora took market prices or other suppliers into account to
guarantee cost effectiveness. Any unstated markups or unnecessary costs
transferred to the government could be a sign of contract violations and
financial mismanagement.
Potential Damages
If the allegations against Aurora Electric are confirmed,
the company could face serious financial consequences. Great Yukon Electric's
$1.2 million yearly profit from coal sales might be a sign of overpriced goods,
particularly if there were less expensive options. The government may pursue
triple damages in addition to civil penalties under the False Claims Act since
the excess would be deemed an overcharge. Aurora might also be responsible for
the costs of the inquiry and the lawsuit. Key documents such as pricing
agreements between Aurora and Great Yukon, independent coal market data, and
financial records comparing Aurora's earnings to those of other clients must be
gathered for a thorough inquiry. To assess the validity of the business's
operations, it will also be crucial to review internal emails or memoranda that
describe pricing plans, thorough cost breakdowns of power generation, and audit
reports on transfer pricing compliance.
Documents & Information to Request
To conduct a thorough investigation into possible
misconduct, several key documents must be reviewed. As they specify the
conditions of their coal transactions, these include pricing agreements between
Aurora Electric and Great Yukon Electric. To evaluate pricing fairness, market
data from independent coal suppliers during the contract period should also be
looked at. The profit margins from sales to Aurora in comparison to other
clients can be assessed using Great Yukon's financial documents, which may indicate
preferential pricing. Intent may be made clearer by internal communications,
such as emails or memoranda addressing pricing decisions. To ascertain if
Aurora's operations adhered to recognized norms, comprehensive analyses of the
company's power generation expenses and any internal or external audit reports
on transfer pricing compliance are also necessary.
Basis of Opinion
In order to assess the whistleblower's claims, the forensic
accountant would base their assessment on important analyses. In order to
detect any unjustified inflation, this entails comparing the coal pricing in
Great Yukon to market rates and determining if the reported $1.2 million annual
profit was excessive in comparison to industry standards. It also entails
examining if Aurora Electric fulfilled the contract's clause requiring power to
be supplied at the "lowest reasonable cost without compromising safety."
The evidence would substantiate the claims and support legal action under the
False Claims Act if it demonstrated the intentional use of non-arm's-length
pricing to overcharge the government.
In conclusion, the available evidence suggests that Aurora
Electric may have violated its contractual obligations by engaging in
non-arm’s-length transactions with its subsidiary, leading to inflated costs
charged to the federal government. These findings strengthen the
whistleblower's case and support the need for further forensic and legal
examination under the False Claims Act.
References
DOJ. (2023). The False Claims Act. U.S. Department of
Justice. Retrieved from https://www.justice.gov/
GAO (2020). Federal Contracting: Fair Pricing Guidelines.
GAO-20-543.
IRS. (2023). Transfer Pricing – Section 482. Internal
Revenue Service. Retrieved from
https://www.irs.gov/businesses/international-businesses/section-482-allocations
Kranacher, M.-J., & Riley, R. (2021). Forensic
Accounting and Fraud Examination (3rd ed.). Wiley.
OECD (2022). Transfer Pricing Guidelines. OECD Publishing.
Wells, J. (2017). Principles of Fraud Examination (6th ed.).
AICPA.
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