Question

Read the following accounting case and then answer the questions thoroughly. Questions are listed below the case.

Taylor and Ryan co-own and operate Hatfield Office Equipment (HOE) for 30 years. A local bank has continually financed HOE, which has an inventory worth millions of dollars. The siblings share ownership of the business. They hired James, Taylor’s son, to handle the company’s bookkeeping responsibilities.

James, 30, had been working in various jobs at the business since high school. He eventually was entrusted with all aspects of bookkeeping for the business: accounts payable, accounts receivable, payroll, and all account and bank reconciliations. Taylor and Ryan gave him check-signing ability and a business credit card.

After becoming the bookkeeper, James married and began a family. As his personal monthly expenses increased, he found it difficult to maintain the lifestyle he had known when he was single and living with his parents.

The fraud scheme began simply. At first, James began illegally using his business p-card (or purchasing card) for small personal expenses, such as gas for his personal vehicle and fast food meals. After several months, his charges for personal expenses increased in number and dollar amount, including charges for taking out his wife and children to fine restaurants, clothing for himself and his family, and even high-end electronic products. No one at HOE noticed the continual increase in charges for personal items because James controlled all payment checks to the credit card company.

James’ fraudulent activities expanded. He began embezzling from the payroll system. Because he was a manager, he didn’t have to use the time clock and began to pay himself for excessive overtime pay. He would give himself paychecks in lieu of not taking vacation time, even though he took all his vacation days. HOE management, Ryan and Taylor were oblivious to what was happening.

James then began writing checks payable to himself, but he would write a regular recurring vendor’s name on each check stub and hand-key it into the computer system. When the bank statements came each month, James would alter the images of the checks on the statements to match the vendors on the check stubs and in the system. Then he would hide evidence of the fraudulent checks he had cashed by photocopying the altered pages of the bank statements and shredding the original statements.

Crafty James wasn’t done yet. He opened a new personal credit card at the business’ bank. Now it was easy for him to electronically make bank drafts for paying the business’ monthly credit card statements and then write company checks to pay his personal card. If anyone reviewed the check stubs, it would only appear that one credit card invoice had been paid each month. James could charge the company’s credit card for his personal expenses and charge additional purchases to this new credit card. He used company funds to pay off both cards. Sweet deal.

Some fraudsters rationalize their thefts as “temporary” loans they will repay later. James executed his frauds without any intention of returning the money. His thefts from the company for 2½ years were eventually large enough to create company cash flow problems.

Taylor accidently discovered the crimes when she was searching the business’ online banking system for a canceled check and discovered that several checks in one month had been payable to and signed by James.

Ryan and Taylor didn’t contact law enforcement nor engage an outside accountant. During its internal investigation, the family determined that it had lost at least $90,000 (though it was probably quite a bit more than that).

When confronted, James confessed and explained how he had stolen the money. The business fired him after he signed an agreement for restitution, which stipulated that the business wouldn’t prosecute.

Before they discovered James’ crimes, Ryan and Taylor had attributed cash-flow problems to a downturn in the economy. And James, of course, concurred. HOE had to lay off employees and cut or reduce employee benefits. The company still hasn’t recovered from James’ fraud schemes.

Discussion Questions: Detailed Explination is Requried

Was the theft preventable? Defend your position by addressing the following:

What internal control weaknesses facilitated the thefts?

What internal controls policies should be implemented to prevent future theft?

Answer 1

Yes, the theft was preventable.

Frauds are intentional and wilfulful acts that are taken care of while performing in order not to be revelead. It is difficult to find the existnece of fruad. However, when there exists a circumstance that leads to generation of doubt in the mind about the existence of fraud that could result in embezlement of cash or assets or any mistatement, it to be looked at with great care.

The circumstances in the current scenario also indicate that if the effectiveness and eficiency of the internal controls are checked properly, the problem could have been discovered much earlier in point of time.

What internal control wekaness facilitated the theft?

Seggregation of duties

As it is clear from the information given, the missing internal control is seggregation of duties. Lack of seggregation of duties is usually prevalant in small organisations where one or few employees perform multiple tasks. We can learn that James was concerned with all the book keeping activities and also he had teh authority to control the payment checks to the credit card company. He was also the manager that made him take advantage of paying himslef for the vacations taken too. He was also given the responsibility to have the custody of the bank statements and the original documents of the vendors that he could easily embezzle. Assigning different people with responsibilities like authorising transactions, recording transactions, maintaining custody of assets such as creddit cards and bank statements helps prevent fraud as there exists internal check where every employee's work is checked by another employee in the way the work is allotted.

What internal control policies should be implemented to prevent future theft?

1. No one person should be responsible for a transaction from its origination to end. If bookkeeping is someone's responsibility, another person should be responsible for maintaining purchase or sale books, authorise purchases, sales and another person should be in charge of the physical custody fo the goods.

2. All the payments made on purchasing credit cards issued to employees should be carefully scrutinized to see if those involve personal expenses that have been charged to office expenses. Also, proper authorisation of these cards is to be considered.

3.Payroll is one area that requires specfic attention. It is to be looked into that there are no dummy payments made to ghost workers or to the genuine workers for time not worked.

4. Ensure that payment is always made based on original documents and the duplicate documents are kept for reference and are not used to embezzle any cash.