Question

Bern Fly Rod Company is a small manufacturer of high quality graphite fly-fishing rods. It sells its products to fly-fishing shops throughout the United States and Canada.

Bern began as a small company with four salespeople, all family members of the owner. Because of the high popularity and recent growth of fly-fishing, Bern now employs a seasonal, nonfamily, sales force of 16. The salespeople travel around the country giving flycasting demonstrations of their new models to fly-fishing shops. When the fishing season ends in October, the temporary salespeople are laid off until the following spring. Once the salesperson takes an order, it is sent directly to the cash disbursement department, where commission is calculated and promptly paid. Sales staff compensation is tied directly to their sales (orders taken) figures. The order is then sent to the billing department, where the sale is recorded, and finally to the shipping department for delivery to the customer. Sales staff are also compensated for travel expenses. Each week they submit a hard-copy spreadsheet of expenses incurred to the cash disbursements clerk. The clerk immediately writes a check to the salesperson for the amount indicated in the spreadsheet.

Bern’s financial statements for the December yearend reflect an unprecedented jump in sales for the month of October (35 percent higher than the same period in the previous year). On the other hand, the statements show a high rate of product returns in the months of November and December, which virtually offset the jump in sales. Furthermore, travel expenses for the

period ending October 31 were disproportionately high compared with previous months.

Required

Analyze Bern’s situation and assess any potential internal control issues and exposures. Discuss some preventive measures this firm may wish to implement.

Identify some problems and issues why this happen.

Answer 1