Question

The national insurance commission for a developing country received a loan from the World Bank to cover the cost of: a) a 2-week trip to the U.S. for 8 top officials of the commission, to observe and learn about insurance regulation in the U.S., and b) a follow-up training program to be held in the developing country for 25 mid-level managers in the insurance industry.

Of the World Bank grant, some $30,000 was reserved to cover the cost of the in-country training, with the remaining funds to be used to cover travel costs for the U.S. trip. The World Bank issued a letter to the commission that specifically directed that the 8 travelers purchase economyclass-fare airline tickets for their trip to the U.S.

However, the 8 travelers felt that they were “big men” in their country and therefore should not travel in economy class, so they purchased 8 business-class airline tickets. Because the cost difference between economy-class and business-class was $3,750 per ticket, the entire $30,000 that was aside for the in-country training was used towards purchasing 8 business-class tickets. As a result, the desperately-needed in-country training was never conducted. Please note that the country still is obligated to pay back the loan in full to the World Bank.

Yes, this is fraud! What internal control might have prevented this situation from occurring?

Answer 1

" Internal Control - Internal control, as defined in accounting and auditing, is a process for assuring of an organization's objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with laws, regulations and policies. A broad concept, internal control involves everything that controls risks to an organization." wikipedia

Internal control is the primary responsibility of management. so to be kept strong at their end.

here following are the points where mismanagement / deficiency in internal control is reflected -

1.The custody of the funds was not in the hands of proper authority. ( the funds was wrongly utilized )

2.The terms and conditions of loan was not considered while discharging their tasks. ( therefore they are still obliged to pay )

the agreement specifically mentioned to purchase economy class tickets.

So the methods to be imposed in internal control for preventing this kind of situation -

- Segregation of duties - All the power/authority related to a particular process must not be in the hands of single person

if there is proper delegation all the person are responsible to each other for the work performed by them. In this case there must be proper delegation of Custody function, authorization function and allocation function for travel expense.

- Allocation of Resources - The allocation must be based on the terms of loan before they are incurred i.e. the expenses of 8 economy class tickets and the training program cost of 25 managers.

this can prevent fraud , other procedures can also be applied such as

- The expenses are paid on reimbursement basis.

-demand the details of petty cash used by officials.

- There must be proper report of the official to be furnished about their US travel.

- Cost benefit analysis can be conducted comparing cost and outcomes of this travel and training.

- Internal Audit can also be conducted.