Question

The following description is excerpted from “Coupon Accounting Abuse,” Management Accounting, January 1993, p. 47.

It's November 15, and Gary, brand manager for a major consumer products firm, is contemplating his year‐end bonus. It is becoming increasingly obvious that unless he takes action, he will not achieve his brand profitability target for the year. Gary's eyes fall to the expense estimate for the new coupon “drop” slated for later in the month. His hand trembles slightly as he erases the 4 percent anticipated redemption rate on his estimate sheet and replaces the figure with 2 percent. Gary knows from experience that 2 percent is an unrealistically low figure, but he also knows that neither the firm's independent nor internal auditors will seriously challenge the estimate. This way, Gary's product profitability report will reflect the increased revenue associated with the coupon “drop” this year, but the entire redemption cost will not be expressed until next year.

“That should put me over,” he muses. A wry smile crosses his face. “If the auditors question the rate, I'll give them a story about seasonality and shifting consumer patterns. They won't know enough about marketing to question my story.” Eventually, of course, the real cost of the coupon drop will have to be expensed, and that will hurt next year's profit figure. “But, that's next year,” Gary reasons, “and I can always figure out a way to make it up. Besides, by the end of next quarter, I'll be handling a bigger brand—if I can show a good profit this year.”

A brief description of coupons and proper accounting for coupons might help us to interpret the situation just presented. Coupons are “cents‐off” privileges, such as $0.50 off when you buy a certain brand of yogurt. When a company offers coupons to consumers, it must estimate the redemption rate and record an expense and the corresponding liability. This is similar in concept to warranty expenses.

Required:

Discuss whether the situation described can happen to a company with a good control environment.

Describe any steps a company could take to prevent such abuse.

Answer 1

No, such situtaion could not be happen within a good control enviornment under an organisation. Only absence of or deficient internal controls could trigger such kind of fraud. Internal controls are the responsibility of management and they are resopnsible for prevention and detection of frauds. Auditor shall before accepting an audit check whether preconditions for an audit are present i.e. determine that whether financial statements are prepared as per financial reporting framework is acceptable or not and obtain an agreement that management understand and acknowledges its responsibility for the existence of such internal control which is necessary for the preparation and prersentation of financial statement as per applicable FRF. Auditor shall apply professional judgement while assessing risk due to fraud. However there is higher chances of non-detection of misstatement due to fraud as higher level of management involve in it. Higher level of managment is in position to override the internal controls and misstate financial statements. In above case of "Coupon Accounting Abuse" its done by Mr.Gary , brand manager who has the power to override the controls as there is no superior authority or adequate internal controls to detect such fraud.

Steps to prevent such abuse-

1- Adequate segregation of duties- There must adequate segregation of duties. Its is mainly done in cash related activities as it is high risky item. there must be proper segregation for ARC i.e. authorising, recording and custody. Different personnel for each activity must be assigned.

2.Risk Assessment process- It is a part of internal control and its not a one time process but an ongoing activity which identify the misstatements before there occurrence and prevent the organisation from its consequences.

Monitoring and Reviewing: The system of internal control should be periodically reviewed by management. By performing a periodic assessment, management assures that internal control activities have not become obsolete or lost due to turnover or other factors. They should also be enhanced to remain sufficient for the current state of risks.

Information and communication: The availability of information and a clear and evident plan for communicating responsibilities and expectations is paramount to a good internal control system.

Control activities: These are the activities that occur within an internal control system. These are fully described in the next section.

Other Internal Control Best Practices

With a good internal control system in place, other considerations to keep in mind include:

Regularly communicate updates and reminders of policies and procedures to staff through emails, staff meetings and other communication methods.

Periodically assess risks and the level of internal control required to protect organisation assets and records related to those risks. Document the process for review, including when it will take place. (Example: Determine that all security activities, reconciliation processes and separation of duties will be reviewed annually. They will, however, be staggered. Security activities will be reviewed in July, reconciliation in September and separation of duties in March.)

Management is responsible for making sure that all staff are familiar with organisation policies and changes in those policies.