Compact Equipment Company - Page 6

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          Petitioner’s Payment of the Construction Expenses                           
               Petitioner’s accounts payable clerk (the clerk) processed              
          all invoices forwarded to petitioner.  Normally, the clerk would            
          match the invoices to corresponding purchase orders and then                
          prepare checks for the appropriate vendors.  If purchase orders             
          did not exist for certain invoices, the clerk forwarded the                 
          invoices to petitioner’s general manager for approval.  After               
          approval, the clerk prepared the checks.                                    
               In 1985, petitioner began receiving invoices from various              
          vendors for lumber and for electrical and plumbing fixtures used            
          in the construction of the Carnelian Bay residence (construction            
          invoices).  The construction invoices did not have matching                 
          purchase orders.  As instructed by Atkinson, however, the clerk             
          forwarded the construction invoices to Atkinson instead of the              
          general manager.  After Atkinson reviewed the construction                  
          invoices and authorized payment, the clerk prepared the checks              
          for the vendors.  After the clerk prepared the checks for all               
          invoices (including the construction invoices), the general                 
          manager reviewed the purchase orders (if any), invoices, and                
          checks and approved the transactions by signing the checks.                 
          After issuing and mailing the checks to the vendors, the general            
          manager or the clerk returned the construction invoices to                  
          Atkinson with copies of the checks, a procedure inconsistent with           
          the company’s normal bookkeeping process and record retention               

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Last modified: May 25, 2011