Question

During a national emergency, a managerial accountant was called back to active duty with the US Army. An acquaintance of the accountant forged papers and assumed the identity of the accountant. He obtained a position in a small company as the only accountant. Eventually he took over from the manager the functions of approving bills for payment, preparing and signing checks, and almost all other financial duties. On one weekend, he traveled to some neighboring cities and mailed invoices made out to the company for which he worked. On Monday morning, he returned to work and began receiving, approving, and paying the invoices he had prepared. The following weekend he returned to the neighboring cities and cashed and deposited the checks in bank accounts under his own name. After continuing this practice for several months, he withdrew all of the funds and never was heard from again.

What steps could you have taken to prevent this theft? Remember that this small company had limited financial resources and limited personnel.

Answer 1

As the company is small and has limited financial resources and limited personnel at its disposal it should look at implementing those internal control measures that can be easily implemented with its limited financial resources and limited manpower.

Internal control is a process which helps an organization achieve its objectives toward operational efficiency and effectiveness. Internal control helps in risk mitigation by detecting and preventing fraud. The components of the internal control process are: (1) The control Environment (2) Risk Assessment (3) Control activities (4) Information and Communication and (5) Monitoring.

The control environment refers to the policies and practices as put in place by the top management of a company. The control environment consists of organizational structure, management’s philosophy, HR policies etc. Risk assessment involves identification and analysis of risks. Control activities refer to the policies and procedures that management has established to meet its objectives regarding financial reporting. Information and communication refer to the activities used to record and process an organization’s transactions. Monitoring is the last component of the internal control system. This involves periodic assessment of the quality of internal control process. If the quality is found to be lagging then modifications will have to be made in the internal control systems.

In this case the company should have a supervisor for the accountant. As the company is small it need not hire an extra individual to monitor the accountant’s actions but should appoint a supervisor from one of the senior employees on the rolls of the company. This will solve the problem of theft. In this case there is a problem of assignment of authority and responsibility, which is a part of the control environment component. The accountant has a free hand and this measure will help to put a check and control to that. Thus all transactions, clearing of invoices and payment through checks should be reviewed by a senior personnel and this will help in preventing theft in future.