Numerous frauds in the early 2000s spurred Sarbanes-Oxleylegislation (SOX). SOX changed the way businesses looked at andreported their internal control structure. Internal controls areneeded both to prevent and deter fraud as well as errors.Segregation of duties is the most commonly considered internalcontrol.
Ben's Barn is a successful, locally owned, organic farmer.Ben and his wife sell produce at local farmer's markets. The farmis the primary source of income for Ben and his family. Ben hasbeen in business for 10 years, and has developed a reputation forhigh quality produce. Ben's extensive greenhouses allow him to growvarieties not native to the local area, which commanded higherprices in the local markets.
This summer, the weather was perfect and Ben had a bumpercrop. Ben and his wife could not keep up, and made the decision tohire a part-time temporary employee for the firsttime. Ben took great pride in his produce, and made thedecision to send the employee to the farmer's market so that hecould tend to the harvest and provide the care he thought itneeded. Ben and the employee would load the produce inthe company's truck, and take it the farmer's market three (3)times per week. Once set up, Ben would spend some time talking withthe other vendors and regular customers, and then return to thefarm. The employee was responsible for cash sales to the marketcustomers. Some inventory was sold by the item, whileother inventory was sold by weight. They set up a small scale atthe booth each day to weigh produce. A portable cash register wasalso taken to register sales and provide receipts to customers. Theregister kept a duplicate copy of the receipts forreconciliation. The register also featured subtotalingfeatures which would add the sales for the day. At the end of theday, Ben would return to help load the remaining produce and closethe produce stand for the day. He would change out the registertape, but like any good farmer, often left the tapes in a folder inhis truck until he could remember to take them into thehouse/office. At the end of each week, Ben's wife made atrip to the bank to deposit cash receipts and to get the properchange/denominations to start the new week's cash box. Since herhusband was so busy, she wasn't able to catch up with him to getthe register receipts to match to deposits, so she just counted thecash and deposited it.
For his records, Ben recorded every detail of the harvest.He wanted to know how to plan for the next season. He recordedquantities and weights of produce harvested by variety. He trackedthe harvest daily, but never reconciled it to sales at the marketand produce that was returned from the market.
Harvest continued to be exceptionally busy. As a result, Bencould barely keep up with writing his employee a weekly payrollcheck. When the bank statements came at the end of the month, hewas too busy for paperwork and failed to reconcile statements untilthe following month. After all, he and his wife had run thebusiness for 10 years this way, he would catch up on paperwork whenit slowed down.
At the end of the season, Ben finally slowed down enough tocatch up on paperwork. He began to review the bank statements, andnoticed that deposits were less than they had been in prior years,when harvests had not been as good. Ben was certain that he hadsold more inventory. In fact, he knew he had because half-waythrough the season he had added an additional day of sales (a 4thmarket) each week. Ben had helped load the truck at the end of eachday, and only a small amount ever returned to the farm. What couldhave happened? Did the employee have something to do with this?Would Ben ever know how much he lost?
For this exercise, your job is to identify controls and putcontrols in place to prevent the loss of a company's liquid assets:cash & inventory.
IF the losses did occur, identify control mechanisms that couldbe put in place to timely detect the losses. Why do you believethose mechanisms would have been effective?
