Question

ABC Satellite, a satellite television company, sells satellite television service contracts to customers, usually for a 24-month period. ABC satellite is a fast-growing, high-paced company created by aggressive salesmen and saleswomen. The company’s success has made its owners very wealthy; many of them live a lavish lifestyle and drive luxury cars to work. The retention division of this company is responsible for contacting customers nearing the end of their contract and convincing the customer to renew their contract. Retention agents are paid a commission for each account that agrees to a new contract. The commission rate is considered by many employees to be below the industry standard. Over the past year, the retention division has undergone significant supervisor and manager turnover. The current manager has not had sufficient time or understanding to properly implement controls. Additionally, the new manager has been so busy playing catch up that he has yet to hold a training or orientation meeting for his department. The current process for paying commissions to retention agents on renewed accounts is as follows:

• The phone system records the verbal contract extension commitment.
• The retention agent attaches the audio recording to the customer’s accounting the ABC customer contract system (CCS); this acts as legal proof of contract.
• The retention agent then updates the customer contract date information in CCS.
• Each retention agent has a spreadsheet he or she uses to keep track of the account renewals for the month.
• The retention agent records the customer #, date of the contract extension, and length of a contract extension in his or her spreadsheet.
• At the end of each month the retention supervisor receives each agent’s spreadsheet and multiplies the total retention renewals submitted by the agent by his or her commission rate in order to calculate the total monthly commission.
• The supervisors do not maintain the spreadsheets.
• In order to get the payments processed quickly, the supervisors have less than four hours for receive all agents’ spreadsheets (usually each supervisor is responsible for 20+ agents) and submit the summary file to payroll.
• The supervisor records the total commission earned by each agent on a summarized spreadsheet, which is sent directly to payroll for payment.

Discussion Questions

1. Part of avoiding fraud is to create a positive work environment. Describe a few conditions mentioned within the case that could contribute to a poor work environment.

2. What symptoms should an auditor look for to determine if fraud is occurring within the retention department?

3. There are five primary control procedures or activities. List and explain one procedure you feel would be most effective in improving the control system of the retention department. Include in your explanation specific examples of controls that should be implemented.

To prepare think about this week's reading assignments and the identified discussion questions. Integrate these concepts and post your individual substantive response. Your original response should be approximately 400 words and uses specific examples from the case and readings. Your original posting is due on WEDNESDAY.

Next respond to a minimum of TWO of your colleagues’ postings in approximately 200 words each. Peer-to-peer responses are on SUNDAY. When responding to your colleagues in the course address their posing in one or more of the following ways:

• Ask a probing question.
• Share an insight from having read your colleagues’ posting.
• Offer and support an opinion.
• Validate an idea with your own experience.
• Make a suggestion.
• Expand on your colleague’s posting.

Answer 1

ANSWER:

1.

Conditions that could contribute to a poor work environment:

• High Turnover: The ABC retention department has recently experienced a high level of management turnover, which makes it impossible for a consistent control environment. It is likely that employees do not feel a high sense of loyalty to the current manager.
• Poor Communication/Training: The new manager is so busy catching up on his new responsibilities that he has been unable to hold a training or orientation with his department. This lowers the employees’ commitment to the company and established processes.
• Perceived Inequities: One potential control environment risk is that management drives fancy cars to work, which portrays to employees a lavish and rich lifestyle. This sort of example can cause employees to feel like they also deserve a rich lifestyle and can lead to increased employee fraud as they rationalize their actions.
• Low Pay: Retention agents are paid a lower commission rate than what they consider to be industry standard. This can be a very relevant fraud risk. Employees often commit fraud when they do not feel they are being adequately paid for their work. Employees can easily rationalize that they are not stealing, but are simply taking the wages that they rightfully earned.

2.

Symptoms the auditor should look for to determine if fraud is occurring within the retention department:

There are not adequate controls around the submission and review of retention agents reported account saves. If retention agents were submitting fraudulent accounts you would expect to see decreasing profitability. The decreasing profitability is due to increasing commission expense that is not accompanied by revenue increase. If all retention agents saves were legitimate we would expect profitability to not decrease, as all commissions paid will be accompanied by customer accounts that renew and continue to make monthly payments.

3.

Five primary control procedures:

• 
  System of Authorizations: Retention agents should not be authorized to update customer contract date information in the CCS. It would be simple for a retention agent to extend a customer contract and take credit for a customer save when in fact the customer never agreed to the extension. If a separate department or person is responsible for updating the customer contract date information in the CCS, they could confirm the legitimacy of the contract extension before authorizing the update to customer contract date information in the CCS.
• Segregation of Duties: Retention agents should not be able to update customer contract date information in the CCS. A separate person or department should update the contract date information in the CCS. If the duties of making a contract extension and updating the CCS are not separated it opens up the possibility of a retention agent fraudulently updating the contract date information in the CCS, and thus getting paid on fake retention saves. The duties of updating the CCS and making retention saves should be separated.
• Documents and Records: Proper documents and records allow for an audit trail. Currently the supervisors do not maintain the record of each agent’s contract saves for the month. This documentation should be maintained so that control effectiveness (the supervisor’s independent check) can be audited and followed up on.
• Independent Checks: Supervisors should be given adequate time to review a statistical sample of each retention agent’s contract saves. The supervisor can verify the legitimacy of the save by listening to the verbal contract that is attached to the customer account. Once the supervisor confirms a sample of the account saves, he/she can process the payroll. Additionally, the department policy should be updated to include a rule that any employee found to have submitted a fraudulent customer account save will be terminated. Physical safeguards are more important when cash or physical assets are at risk to be misappropriated, which is not the case in the retention department.