Question

Analyze the following case from Turner, Weickgenannt, and Copeland (2017):

At the old city hall, mail was sorted in a glorified closet—not the sort of place you'd expect to be frequented by a high‐ranking city official with multiple degrees. However, the city of Weston's chief financial officer, Steve Kaufmann, had an unusual interest in the mail. He was often known to greet the postal carrier at the door to receive the day's delivery, take it to the mail closet, then immediately remove selected envelopes and parcels and take them to the privacy of his office. Other times, he would request hand delivery of incoming payments, circumventing the mail closet altogether.

These activities were part of an elaborate embezzlement scheme that resulted in the loss of millions of dollars for the city. Mr. Kaufmann was intercepting checks written to the city and endorsing them to his personal bank account.

The procedural manual for Weston's accounting department described mailroom policies, including the requirement for a clerk to log checks into a computer file and prepare a receipt. Another employee was responsible for preparing an independent verification of the amount of the receipts, and a third employee made the bank deposit. Despite these written guidelines, Mr. Kaufmann was often known to carry out some of these tasks himself, or to claim to be doing so.

In response to the news of this fraud, the CFO of a neighboring community commented that many cities are unable to achieve strong internal controls because of the limitations of small staff size and tight operating budgets. Rather, small cities often have no choice but to rely on the integrity of their employees. (p.100)

Perform an analysis on the internal control activities that were violated in order for Mr. Kaufmann to perpetrate this fraud. Is this case an example of management fraud or employee fraud? Determine if the city's procedural manual was adequate for prescribing internal controls to prevent this type of fraud. Why do you think no one reported the unusual mailroom practices of Mr. Kaufmann?

Answer 1

Ques 1)
A case could be made for any or all of the internal control activities were violated in this scenario. With regard to authorization, it can be said that Mr. Kaufmann abused his authority by Bypassing the established controls in order to carry out these transactions on his own. His interference in the mailroom procedures made it impossible for any segregation of duties to occur. There was apparently inadequate security and documentation for the assets and transactions with which he was involved, and there was no one willing to come forward to review or reconcile these transactions.
Although it involves misappropriation of assets, which is typically an employee fraud, this was conducted by the chief financial officer. Accordingly, it would be considered a management fraud. It is not likely that Mr. Kaufmann would have been able to carry out his fraud if it had not been for his high-ranking position, which apparently prevented anyone from stopping him

Ques 2)
Written guidelines were in place regarding the mailroom and bank deposit policies, requirements for logging checks received and performing an independent verification of receipts, these guidelines were obviously not followed when Mr. Kaufmann stepped in. Rather than being a problem with the documented policies, this case seems to present a situation marked by Bypassing /lack of controls.

Since Mr. Kaufmann was the highest ranking financial officer in the organization, employees who suspected misconduct likely believed that there was no one with authority over Mr. Kaufmann to whom the problem could be reported. If management is involved in fraud, it should be brought to the attention of the board of directors. In the case of a municipality, the problem could be reported to the chief administrator, mayor, or the city’s advisory council.There should be a proper whistleblower mechanism in plaec where the where the whistleblower is ensured his safety .