By William J. Hayes, managing editor, Pennsylvania CPA Journal

The PICPA recently posed a scenario to three of our members – one in industry, one from public accounting, and one who has experience in ethics and forensic accounting. This was the deceptively simple puzzle:

A man walks into a store and steals a $100 bill from the register without the owner's knowledge. He comes back five minutes later and buys $70 worth of goods with the $100 bill. The owner gives him back $30 in change. How much money did the owner lose?

Posing this case to CPAs, we were not surprised by the thorough explorations we received. It was, however, interesting to see how different their answers could be.

Nicholas S. Huntington, Vice President, Internal Audit, PSECU

I reviewed this scenario from my current perspective as internal auditor (former financial crimes professional and management accountant) and think that it comes down to how you interpret the question, “How much money did the owner lose?” The owner lost $100 on the initial theft (credit cash, debit over/short). The owner made an unknown profit (or loss) on the subsequent sale of goods (debit cash, credit sales, and credit inventory, debit cost of goods sold). There could be other indirect costs associated with researching/investigating the initial theft, but that information is not included in the fact pattern.

John Kostrab, Supervisor, Herbein + Company Inc.

This is a very interesting riddle. Depending on your perspective you could have multiple correct answers. Is the answer $100…$70…$30? Or is it some other number? Are you looking at the situation from a profit and loss standpoint? A cash flow standpoint? I was asked to look at it from a tax perspective. So, here we go. Let’s assume that the cost of goods sold (COGS) is 50% of the sales price and the tax rate is 31% (21% federal and 9.99% PA). He would pay $10.85 in tax ($70 sale - $35 COGS = $35 taxable income x 31% tax rate) on a sale that technically never occurred. Another way to look at it is that they lost the opportunity to deduct the $35 of COGS on a legitimate sale. The $30 in change given back to the thief does not affect the owner’s taxes.

To throw another fly into the ointment, at the end of the day when they count the money in the drawer, they will be $100 short. They will be able to deduct that $100 as a cash over/short expense. Based on the new wrinkle, let’s take a look at the three taxable events that occurred. The $15.50 ($100 - $50 x 31%) tax on the transaction that generated the original $100 plus $10.85 tax on the second transaction less the $31 ($100 x 31%) savings from the write down equals a $4.65 tax savings. Is it possible that they will actually save on their tax liability by having $100 stolen from their drawer?

I’ll leave that up to you to decide.

Donna M. Pironti, Owner, Tax and Forensic Accounting Solutions, and Member of the PICPA Professional Ethics Committee

When presented with this question, at first I was like … “Oooh, a math problem” (I always loved those – I know, a complete math nerd!). But that really isn’t the case here when you apply CPA ethics, forensic accounting, and tax training. Sure, you could argue that the thief got $70 of sales and $30 of cash ($100) or the thief got $30 in cash plus only the actual out-of-pocket costs of the goods (some amount less than $70). However, neither of those consider the time of the salesperson who could have been doing something else for the business or have been making a real sale. Also, I would hope the owner has insurance and would be able to claim the loss and get the money back or take an “inventory shrinkage” as an expense on the company tax return and have a tax savings. It’s not just simple math! Thinking further about the actual incident, this is not going to be a one-time event, as it probably had either happened before or will happen again. This makes the overall theft cost a greater problem. How much has the owner already lost and how much will be lost if security measures aren’t put in place? Anyone who owns a business should talk with a CPA to make sure that they have measures in place to ensure all assets are secure. This includes internal control methods like better monitoring of registers, inventory, and any person in control of financial records. The best thing for any business owner to do is get trained and educated on how to keep assets protected so the business can grow and blossom rather than fail due to lack of internal controls.

This is a riddle without an easy answer. Many thanks to our members for offering their perspective on the matter. If you are reading this and have a different perspective, please feel free to submit your own answer in the comments section. We’d be interested in seeing how you answer the question.

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