In: Accounting
The bookkeeper of a construction company knew there were hundreds of transient workers on the payroll at any given time. She also knew that at any point in time many workers dropped off the payroll and many more joined. She also knew that no one was checking her work. She handled the payroll, used the owner’s signature stamp on checks, and hand delivered the checks the various job sites. The bookkeeper kept a handful of former employees on the payroll, both male and female. She even paid their union dues and payroll taxes. However, instead of delivering these checks to the job site, where of course the employees no worked, she endorsed the bank of the checks and deposited them into her bank account. She was friendly with one particular teller at the bank branch and used this teller exclusively to deposit the checks. Several people at her employer were curious as to her new executive automobile, new home and rumored house at the beach, which she passed off as the result of her husband’s large win at the casino. However, it took a prolonged illness and enforced absence from the office for a temporary bookkeeper to question why nonemployees were still on the payroll. She was found out.
1) Identify risks and/or red flags in this case that provided the opportunity for fraud.
2) Identify controls that needed to be put in place that might have mitigated this risk.
3) What is a way to transfer risk of employee theft to a third party?
1. The risks in this case that provided the opportunity for fraud:
-There was no check over the work of the bookkeeper. The important maker checker concept was missing.
-She was given the owner's signature stamp which is a severe deficiency in internal control as she could make any number of unauthorized payments.
-She handled the payroll and the payment. This gave her ample opportunity to create fake records and embezzle money.
- The red flag in this scenario is the sudden change in the lifesyle of the bookkepper characterized by her new car, new house and beachside property.
2)The controls that needed to be put in place to mitigate the risk are as follows:
?- ?The work of the bookkeeper should have been checked by a senior accountant.
- The system should have internal limitations to block the name of the employees who have left the organization by linking of human resource and accounting records.
- The authorization of payments should be according to a defined hierarchy and the signature stamp should not be provided.
- The record keeping and the payment function should be separated i.e. allocated to different individuals.
3)The way to transfer risk of employee theft to a third party is by taking a fidelity insurance. This insurance policy compensates the organization for financial loss due to dishonest acts of employees.