Question

Frank James a highly competent employee of Brinkwater sales Corporation had been responsible for accounting related matters for 2 decades. His devotion to the firm and his duties had always been exceptional, an over the years, he had been given increased responsibility. Both the president of Brinkwater and a partner of independence CPA firm in charge of the audit were shocked and dismayed to discover that James had embezzled more than 500,000 over a 10-year period by not recording billions in sales Journal and subsequently diverting the cash receipts. What major factors permitted the embezzlement to take place?

Answer 1

The reason for such embezzlement is due to the following :

1. Absence of segregation of duties -
If one single person is entrusted with the whole responsibility, there are chances for him to commit fraud. It is advised that the following activities / responsibilities relating to a single transaction should be performed by different people :

• a) recording of the transaction
• b) authorising of the transaction
• c) safekeeping/ physical custody of any related asset
• d) Reconciliation

In the above situation , if there was segregation of duties the embezzlement wouldn't have been possible .

2. Lack of close supervision on the employee

When there is no close supervision, the chances of employees to embezzle money is high and vice versa.

3. Lack of proper internal control system in place

A good internal control system puts a formal policies and procedures in place , which establishes a defined flow of activities which helps to prevent any fraud from occurring. Example usage of sequentially prenumbered invoices etc

4. Lack of proper inventory controls / physical stock checks -

If the organisation had good control over its physical inventory , such misappropriation could not have happened for so long .

5. Absence of strong internal audit function within the organisation-

A strong internal audit function or team within the organisation could easily detect and prevent such misappropriation of funds without much delay .