Question

John Johnson is the majority stockholder in Johnson’s Landscape Company, owning 52% of the company’s stock. John asked his accountant to prepare a capital investment analysis to purchase new mowers. John used the analysis to persuade a loan officer at the local bank to loan the company $100,000. Once the loan was secured, John used the cash to remodel his home, updating the kitchen and bathrooms, installing new flooring, and adding a pool.

Requirements

1. Are John’s actions fraudulent? Why or why not? Does John’s percentage of ownership affect your answer?

2. What steps could the bank take to prevent this type of activity?

Short answer

1. Theactions followed by John are fraudulentand will affect the company's other stakeholders.
2. Inspection after disbursement and disbursement through check in the name of the machine vendor.

Step-by-step solution

Definition of Fraudulent Activities

The intentional action is taken to take undue advantages by using false facts, and illegal means are known as fraudulent activities.

Actions of John

The action of John is fraudulent because he is taking a loan in the company’s name and using it for other purposes. Even if he has a more significant stake in the company, he must not use the company's fund for personal use.

The loan will become the liability of the company,not John. If John sells his stake in the company, then the overall burden of the loan will fall on the company, and the other stakeholders will get affected.

Step that a bank must take to prevent the fraudulent activities

The bank must not provide cash;instead, the bank must issue the check in the name of the company from whom the mower will be purchased. It will restrict the use of loans towards a specific activity only.

The bank can also visit the company after loan disbursement to check whether the company has used the funds in the specified activity or not.