Question

Stark Holidays is an independent travel agency. It does not operate holidays itself. It takes commission on holidays sold to customers through its chain of shops. Staff are partly paid on a commission basis. Well-established tour operators run the holidays that Stark Holidays sells. The networked reservations system through which holidays are booked and the computerized accounting system are both well-established systems used by many independent travel agencies.

Payments by customers, including deposits, are accepted in cash and by debit and credit card. Stark Holidays is legally required to pay an amount of money (based on its total sales for the year) into a central fund maintained to compensate customers if the agency should cease operations.

Required:

1. Describe the nature of the risks to which Stark Holidays is subject arising from fraud.

Answer 1

Based on the data given in the question above, Stark Holidays is an independent travel agency which does not operate holidays itself but rather operates on a commision on the sales it makes to the customers. Staff are also paid on commission basis. Additionally, Stark is legally required to pay an amount of money into a central fund maintained to compensate customers.

The following are few of the risks that Stark Holidays is subject to arising from fraud.

1.) Cash payments:-

As can be seen from the question, Stark Holidays accepts cash payments from the customers. When there is physical cash involved in the process of making the reservations, there is a high chance of collision among the employees and delaying the recording the receipts. For example :- When a customer makes a payment in favor of his booking, he/she might have paid the advance for the booking through cash. The finance department personnel, after receiving the cash, may still not show the actual receipt of the cash in the books of account. When such cases occur, the amount would be stil reported under Accounts receivable and it becomes difficult for the business to understand its cash availability.

2.) Offline Trading:-

Since the employees of Stark holidays are the first hand information holders about the way the system works, it might promote a system of offline trading. To achieve this, two or three employees within the company may also collide to cover the original facts. For example - Any customer who visited Stark holidays to book a vacation package speaks to the customer care executive of Stark Holidays. The customer care executive , now, would on his personal capacity, with much knowledge about the travel industry, would now provide a customized package for the customer and would try to pocket the commission percentage that is earned on the proposal. Another case might be , the employer bills 50% of the holiday package through the company and the remaining 50% would be billed through his personal capacity, thereby providing a chance to him to earn commission on the remaining 50% of the sales value.

3.) Inflate Results :-

As the travel market is a booming sector across the world, in order to attract investors and shareholders, Stark Holidays might inflate the financial results of the company. This would happen when the top level management is also involved as the financial statements would need to be reviewed and approved by the top level management.

4.) Online Fraud :-

In the world of modern technology and increasing transactions through the digital mode, the company is bound to be vulnerable if there is no proper online security within the company. There are professional hackers who would try to enter into the company's website and try to steal the confidential client data and bookings. Any employee having acces within the company might also leak confidential client information relating to the customer accounts and relating to the firm's online security that makes the system vulnerable for online fraud.

5.) Fictitious Reservations :-

If there is a incentive based compensation in place, whereby the employees of Stark Holidays are promised incentives on the volume of sales made, if there are lack of effective controls, may make fictitious travel reservations to achieve the targets and may later cancel the reservations once the incentives are paid. This promotes fraud and if in case the company decides to have an Incentive based compensation, the company can have effective controls in place so that the scope to commit such frauds are reduced to a minimal exten.

The above issues are just a suggestive list that Stark Holidays might experience with respect to the risks arising from fraud. However, it might differ depending on other factors like circumstances of the company, volume of transactions, effectiveness of internal controls, hierarchial structure,the number of employees working for it,etc.