Read thefollowing accounting case and then answer the questions thoroughly.Questions are listed below the case.
Taylor and Ryan co-ownand operate Hatfield Office Equipment (HOE) for 30 years. A localbank has continually financed HOE, which has an inventory worthmillions of dollars. The siblings share ownership of the business.They hired James, Taylor’s son, to handle the company’s bookkeepingresponsibilities.
James, 30, had beenworking in various jobs at the business since high school. Heeventually was entrusted with all aspects of bookkeeping for thebusiness: accounts payable, accounts receivable, payroll, and allaccount and bank reconciliations. Taylor and Ryan gave himcheck-signing ability and a business credit card.
After becoming thebookkeeper, James married and began a family. As his personalmonthly expenses increased, he found it difficult to maintain thelifestyle he had known when he was single and living with hisparents.
The fraud scheme begansimply. At first, James began illegally using his business p-card(or purchasing card) for small personal expenses, such as gas forhis personal vehicle and fast food meals. After several months, hischarges for personal expenses increased in number and dollaramount, including charges for taking out his wife and children tofine restaurants, clothing for himself and his family, and evenhigh-end electronic products. No one at HOE noticed the continualincrease in charges for personal items because James controlled allpayment checks to the credit card company.
James’ fraudulentactivities expanded. He began embezzling from the payroll system.Because he was a manager, he didn’t have to use the time clock andbegan to pay himself for excessive overtime pay. He would givehimself paychecks in lieu of not taking vacation time, even thoughhe took all his vacation days. HOE management, Ryan and Taylor wereoblivious to what was happening.
James then beganwriting checks payable to himself, but he would write a regularrecurring vendor’s name on each check stub and hand-key it into thecomputer system. When the bank statements came each month, Jameswould alter the images of the checks on the statements to match thevendors on the check stubs and in the system. Then he would hideevidence of the fraudulent checks he had cashed by photocopying thealtered pages of the bank statements and shredding the originalstatements.
Crafty James wasn’tdone yet. He opened a new personal credit card at the business’bank. Now it was easy for him to electronically make bank draftsfor paying the business’ monthly credit card statements and thenwrite company checks to pay his personal card. If anyone reviewedthe check stubs, it would only appear that one credit card invoicehad been paid each month. James could charge the company’s creditcard for his personal expenses and charge additionalpurchases to this new credit card. He used company funds to pay offboth cards. Sweet deal.
Some fraudstersrationalize their thefts as “temporary” loans they will repaylater. James executed his frauds without any intention of returningthe money. His thefts from the company for 2½ years were eventuallylarge enough to create company cash flow problems.
Taylor accidentlydiscovered the crimes when she was searching the business’ onlinebanking system for a canceled check and discovered that severalchecks in one month had been payable to and signed by James.
Ryan and Taylor didn’tcontact law enforcement nor engage an outside accountant. Duringits internal investigation, the family determined that it had lostat least $90,000 (though it was probably quite a bit more thanthat).
When confronted, Jamesconfessed and explained how he had stolen the money. The businessfired him after he signed an agreement for restitution, whichstipulated that the business wouldn’t prosecute.
Before they discoveredJames’ crimes, Ryan and Taylor had attributed cash-flow problems toa downturn in the economy. And James, of course, concurred. HOE hadto lay off employees and cut or reduce employee benefits. Thecompany still hasn’t recovered from James’ fraud schemes.
Discussion Questions:Detailed Explination is Requried
Was the theftpreventable? Defend your position by addressing the following:
What internal control weaknesses facilitated the thefts?
What internal controls policies should be implemented to preventfuture theft?
