Question

Levon Helm was a kind of one-man mortgage broker. He would drive around Tennessee looking for homes that had second mortgages, and if the criteria were favorable, he would offer to buy the second mortgage for “cash on the barrelhead.” Helm bought low and sold high, making sizable profits. Being a small operation, he employed one person, Cindy Patterson, who did all his bookkeeping. Patterson was an old family friend, and he trusted her so implicitly that he never checked up on the ledgers or the bank reconciliations. At some point, Patterson started “borrowing” from the business and concealing her transactions by booking phony expenses. She intended to pay it back someday, but she got used to the extra cash and couldn’t stop. By the time the scam was discovered, she had drained the company of funds that it owed to many of its creditors. The company went bankrupt, Patterson did some jail time, and Helm lost everything.

Requirements

What was the key control weakness in this case?

Many small businesses cannot afford to hire enough people for adequate separation of duties. What can they do to compensate for this?

Answer 1

Ans 1. Segregation of duties is the key control weakness in this case. There should not be the one person who is responsible for accounting records and funds also. Here in the given case, Patterson had access to both the funds and the accounting records, and because of the access to both of them she concealed the money and did theft. Ideally, the person in charge of the fund should have no access to the accounting records and vice versa.

Ans 2. Sometimes, small companies cannot afford to hire enough employees for adequate separation of duties. Pre employment assessment/screening is one of the ways to compensate for this and trying to segregate the most important roles is another. A well assessment of pre employment can help in assessing whether an employee poses a possible security risk and whether such employee is misrepresenting himself/herself ?

Such small companies can segregate their important work being crucial financial records and transactions, customer strategies work etc to compensate if they don't have enough people for adequate separation of duties.