Question

Every year, Jessica Gomez, CEO of Logan Construction Company, takes a two week vacation to Barbados and signs multiple blank checks to pay for any major bills that come due while she is away. Jessica's vacation occurs towards the end of Logan's fiscal year. Carl Johnson, controller for the company, uses this practice for his gain. He identifies a very large invoice from a vendor, makes out a check to himself for that amount, and records it as a payment to the vendor for acquisition of supplies. He holds the check for several weeks to ensure the auditors will not review the canceled check. Not long after the first of the year, Johnson resubmits the invoice to Gomez for approval and records the check in the cash disbursements journal. Johnson then marks the invoice as paid and files away with other paid invoices. Johnson has been performing this activity many years and believes he has no risk of getting caught.

Required:

There are so many opportunities for improvement in the internal controls in this scenario. With an unlimited amount of funds, many people, and an unlimited time frame, a company could virtually eliminate all control risk. Practically speaking, though, that is not feasible for 95%+ of all companies. Small companies like Logan Construction especially struggle with control risk in the areas of acquisition and financing because they operate with minimal staffing, restrictive budgets, and a remote workforce.

If you were consulting with Logan Construction on internal control improvement opportunities, provide two short term suggestions for controls improvement, and one long term suggestion that the company might need to plan for financially or technologically.

Answer 1

Short Term suggestions:

1. Here CEO Jessica Gomez, can get special cheques from her Bankers of a maximum limit, say $ 1,000/-, as these cheques can be issues only for small payments in her absence, she can avoide major frauds. As for any major payments, the payments terms can be negotiated with vendors and credit term can be requested.

2. As CEO Jessica Gomez, goes on vacations for shorter durations, she can forward an advance to her Finance Controller for meeting any emergency payments, and she can take a report of such expenditure from her FC when she is back.

Additionaly CEO Jessica Gomez can review the Vendor payables aging report before going on vacation, and she can prepare post dated chques for any payables which will be becoming due during her absence, instead of issuing blank cheques.

Long Term Suggestion:

Install a payables software (Like SAP ERP) which should be linked to your Accounting software as well as bank portals. Bank details of each and every vendor should be updated in the softwares. Inititate payments only throught such softwares and stop issuing cheques or manual payment processing. Assign Multiple signatories for authorizing payments. Authorised signatories should be periodically reviewed and updated.