Question

In: Accounting

Steven was Sales VP for Rales, Inc. a middle-market advertising firm that he joined 20 years...

Steven was Sales VP for Rales, Inc. a middle-market advertising firm that he joined 20 years ago. Due to his tenure, Steven had personal relationships with the Board of Directors and other C-Suite executives, and he used his positon to intimidate other employees especially when he felt challenged.

As a result of Steven's frequent travel, he frequently submitted sizeable expense reports. He often submitted delinquent expense reports which made it difficult for the accounting department to match the business purpose of the expenses he submitted. When questioned about an expense report item, he became rude which made people not want to challenge Steven.

Rales, Inc. hired John, a recent graduate, as accounting manager. Rather than backing off after being unfairly ridiculed by Steven, John decided to perform a comprehensive audit of several years of Steven’s expense reports and uncoveredfictitious receipts, mileage for travel never taken, and numerous personal expenses. Uponbeing confronted, Steven claimed that these items were merely “perks” for his great performance and company longevity.

(a) Explain what may cause Steven to commit fraud.

(b) Explain what fraud controls Rales, Inc. should implement

Solutions

Expert Solution

(a)Steven was the Sales VP for Rales Inc. The reason why Steven may commit fraud are as follows:

  1. Failure by Rales Inc to establish adequate procedures to detect the fraudulent activity.
  2. One of the reasons for the fraud are due to failure to record the sales and personally pocket the cash for his own benefit. This kind of frauds could be broght to light i.e they can be detected and the future occurrence can be discouraged by ,maintaining proper records.
  3. Steven has personal relationship with the board of directors and he is in the position of the VP and therefore the focus is only on the numbers .Even his junior employees feel like numbers to him. So his only aim is to achieve his goals at any cost and therefore at times gets himself detached from the overall organizational goals and therefore due to market and shareholder pressure it leads to him committing the fraud.

(b)The various fraud controls that Rales Inc should put in place are as follows:

  1. The reasons why frauds are committed boils down to the three factors of rationalization , potential pressure and the opportunity factor. It is not possible to work on the first two factors but they can work on the opportunity factor and for that they can put in place proper internal controls so that the fraud is not committed and the organization or all other employees are also not adversely affected due to the fraud.
  2. There should be a proper awareness policy in the organization among the employees regarding the fraud risk policy which includes the various types of frauds and the consequences of committing the fraud. Sometimes the information and the tips may be gathered by the organization from not just the employees but also clients and that will keep in check people like Steven
  3. Documentation is very important control that can reduce frauds . All expenses should be properly documented and only then they should be reimbursed. All travelling expenses should be reimbursed as business travelling expenses only if they commensurate with the business brought in by steven .
  4. The internal control programs should be monitored and revised on a consistent basis so that they are keeping in touch with the current situation and the technological advancements.  
  5.       

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