Question

In: Accounting

Scott Caldwell entered Harvest House Ministries, an Australian drug and alcohol rehabilitation facility, to try to...

Scott Caldwell entered Harvest House Ministries, an Australian drug and alcohol rehabilitation facility, to try to kick a severe case of alcoholism. He got sober, and while he was residing at Harvest House he worked hard on—and ultimately earned—a professional accounting certificate. By this time, Scott was well-known to everyone at Harvest House, and thanks to his pleasant personality, had become well- liked—even trusted. So trusted was Scott by the directors of the organization, that they offered him a full-time job as a bookkeeper. He was given full authority to handle Harvest House’s day-to-day financial transactions and maintain its financial records. To Scott, nothing more wonderful could have happened. Everything went along fine for about five years and Scott proved to be a reliable employee. Until . . .A long-overdue surprise audit revealed that Scott had been diverting Harvest House funds to his own personal accounts for three full years. He had managed to embezzle about $300,000 from the charity’s payroll and fundraising accounts before the audit revealed his fraud.

Required

How could this fraud have been prevented? List four (4) internal control measures that should have been implemented to prevent this fraud.

Solutions

Expert Solution

This fraud could have been prevented by putting in place proper control mechanisms and internal control measures. It should be noted that 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.

Four internal control measures that should have been implemented to prevent this fraud are:

  1. Appointing a supervisor for Scott – In this case apparently there is no supervisor for Scott and no one is supervising or monitoring Scott’s work. As mentioned in the case Scott has full authority and thus has a free hand. By appointing someone above Scott there would have been a better assignment of authority and responsibility. This is a part of the control environment aspect of internal control.
  2. Doing regular audits – In this case audit was done after five years. This is a serious lax and regular audits would have not given Scott the opportunity to divert funds to his personal account. This is also a part of the control environment aspect of internal control.
  3. Regular risk assessments – The management should have done regular risk assessments. This would have entailed identification and analysis of risks. Doing such an analysis would have given management a perspective about the possibility of fraud by Scott.
  4. Monitoring – The management should have done a periodic assessment of the quality of internal control process. Had they done this they would have found the quality of the organization’s current internal control system to be lagging and they could have introduced modifications that would have made their internal control robust.

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