Study the case that starts on page 2 carefully. Then writeconcise answers to the following questions regarding the internalcontrol system of Duarf, Inc. Clearly label your responses withproper headings and subheadings. Be very specific and precise.Answers that appear to be beating around the bush will not get anycredit.
1. What are the controls in place that under normal conditionsshould function well to prevent embezzlements or frauds? Identifyand list (enumerate distinctly) at least 5 strengths and explainwhat potential problem(s) each control helps to prevent. (You mustseparately identify each to get proper credit.)
2. What are the additional control strengths of the system that mayhelp uncover problems or deter frauds? Identity and list (enumeratedistinctly) at least three. Did they work?
3. What are the weaknesses in the system? Identify and list(enumerate distinctly) at least three. For each control weaknessyou have identified, suggest a way to overcome.
4. From the human behavior perspective, why did the system fail?Give at least two distinct reasons. What lesson can you learn fromthis failure? Feel free to add any additional comments concerningthe fraud.
5. Search the Business Source Complete database in the UMD onlinelibrary to find a fraud case involving employee misappropriation ofassets. The case must be published within the last four years. (Theselected article must have a case as the focal point. An articlewith a general discussion of fraud will receive no credit.)Concisely and clearly tell the story. Explain how the fraudoccurred and why the fraud scheme was possible. Then compare yourfindings from the case with those in the Duarf, Inc. case in anyway you see fit. Attach the fraud case you found with yourpaper.
Page 2
Note: Be specific in supporting your points. For example, simplystating that the companyΓ’ΒΒs segregation of duties appearsatisfactory as a strength will receive no credit. You must clearlyarticulate which duty is segregated from what other duties and howthis segregation helps to strengthen the companyΓ’ΒΒs internalcontrol. Page limit is 5, standard margin, Times New Roman 12font.
SandyΓ’ΒΒs initial success at embezzlement prompted him to try itagain. What led Sandy to jeopardize his career and personalwell-being, knowing full well that what he was doing was wrong?
ABSTRACT Businesses today rely heavily on computers to cut costs,increase transaction speed, create competitive advantages and storevital information. This embrace of computer technology often meansmoving to large systems and networks. Although these systems andnetworks come with built-in controls, such as segregation ofduties, they can never replace honest management. In this case, amanager under financial pressure used his influence over hisemployees to bypass the system controls. He was able to embezzlemoney until one employee courageously stood up to his questionableprocedures.
BACKGROUND Duarf, Inc. owned several media businesses, such asnewspapers, radio stations and magazines. It operated in many ofthe largest markets in the United States and Canada. The companyhad grown primarily through acquisitions over the past ten yearsand still used several of the acquired business systems.
Last year, the company decided to centralize all of its accountspayable processing, such as purchase orders, vendor maintenance,invoice processing and check printing. To accomplish thiscentralization plan, the company purchased the latest technology.Following the purchase, training sessions were held to ensure allprocessors and management could use all of the system'sfunctions.
This technology included a robust database software package. Thesoftware provided internal controls, including matching invoices topurchase orders and receiving reports, signature dollar limits,segregation of processing duties and a controlled vendor list. Allof the internal controls associated with the software wereadequately designed. They were tested and found to be functioningproperly within the system.
Before the centralization, Duarf, Inc. had eight separate accountspayable departments throughout the subsidiaries that processedapproximately 7,000 transactions per month. At month-end, eachdepartment had to submit a consolidation package to corporateaccounting. After the centralization, the accounts payabledepartment was processing approximately the same number oftransactions but was staffed with fewer full-time employees. Also,the consolidation process had been reduced to one package eachmonth instead of eight. Duarf, Inc. had realized the planned costsavings and management was delighted with the results.
4
THE PROBLEM Sandy Blanquet was a senior manager supervising theaccounts payable process at Duarf, Inc. Sandy started at CloudyNews, a mid-size newspaper, about ten years ago. When Duarf, Inc.acquired Cloudy News two years ago, Sandy was the accountingcontroller. As a result of the acquisition, Sandy was offered theopportunity to take part in centralizing the accounts payableprocessing for all of Duarf, Inc.'s subsidiaries. After thecentralization process was completed, Sandy took on theresponsibility of overseeing the entire department, from openingmail to processing payables to cutting checks. He managed 20employees through four supervisors. In addition to managing thedepartment, he was a check signer.
Sandy's system access only allowed him to view accounts payabledata. He could not process any transactions, edit the vendor listor print checks. However, he did review all voucher packagesrequiring a second signature. All checks had a facsimile signatureprinted by the computer system's check printers. Checks over $5,000required a second signature (in other words, Sandy's signature).Checks over $50,000 required a third signature (i.e., vicepresident or above).
FINANCIAL PRESSURE Sandy had always enjoyed the high life. He drovea new sports car. He lived in an upscale home. He took greatvacations. Some might have said he lived just barely within hismeans. Having just returned from an extended vacation to Hawaiiwith his credit cards closing in on their limits, Sandy found thatthe advertising market had taken a turn for the worse. A couple ofmonths later Sandy was in trouble because most of his savings wereinvested in Duarf, Inc. stock. He was overdue on his car paymentand his mortgage. "If I can just get some money, a loan orsomething, for a couple of months, I could get ahead," he thought,sitting at his desk on the fourth floor at Duarf, Inc.'sheadquarters. He rubbed his eyes. "Think," he murmured, knockingthe side of his head with his knuckles. Then it dawned on him. "Ah.Maybe I can borrow some money from Duarf. A check. No one will missit and I will repay it as soon as I can." He turned to his computerscreen and started to form a plan.
Employee 1
Jack Cross started at Duarf, Inc. three years ago as a corporateaccounts payable associate. His primary responsibility was toprocess invoices paid by the corporate headquarters. His work ethicand knowledge of the process were valuable assets to Sandy duringthe centralization process. After the centralization was completed,Jack was promoted to senior associate responsible for maintainingthe approved vendor list.
"Hey Jack, this 'Designing Pluz' invoice was just overnighted to mewith a rush on it from some vice president at our Los Angelesprinting site. Is this an approved vendor?" asked Sandy, sounding alittle irritated. Jack looked up, slightly startled to see Sandyenter his cubicle.
"No, I don't see them in here," Jack said, fumbling with thekeyboard. "Do you want me to add them to the vendor list?"
5
"Yeah, could you do that right now? I am going to walk this over toMabali for processing. Don't bother with the verification form, itwill take too much time," Sandy added somewhat curtly, knowing thatif Jack completed the verification form, he would call thetelephone number on the invoice to verify the vendor's information.Jack quickly added the vendor to the list.
Employee 2
Mabali Smith recently returned from her honeymoon. She had spentthree weeks in India, touring and visiting relatives. Mabalistarted with Duarf, Inc. at the time of the centralization and wasan accounts payable associate with invoice processingresponsibilities. Chris Topper, a senior associate, reviewed hervouchers for posting.
"Mabali, I have a rush invoice here from the L.A. printing site.Are you busy?" Sandy asked as he approached Mabali's desk. Mabali,who was talking to her husband on the telephone, quickly hungup.
"Oh, hi, Sandy. Uh, no, I'm not busy. Who's it from?" sputteredMabali, obviously surprised by Sandy's presence.
"It's from some V.P. over there. He thinks he can just send me aninvoice and expect it to be processed immediately. Here is hissignature." Sandy pointed to the invoice. "Are you sure you are nottoo busy?"
"Oh no. I'm not too familiar with this signature. Should I look himup in the authorization limits file to make sure he can approvethis invoice?" asked Mabali.
"Don't worry about it. If he's a V.P., he's authorized up to$50,000," counseled Sandy. Mabali entered the invoice into thesystem.
"I can put this in Chris's in-box and let him know it's a rushjob." Mabali suggested.
"Actually, I'm going to have Juan post it. I have to talk with himanyway." Sandy took the invoice and walked towards Juan's cubicle,knowing that Juan had authority to override the purchase ordermatching process.
Employee 3
Juan Namkaps started with Cloudy News five years ago, and had knownSandy for most of those years. When Cloudy News was acquired byDuarf, Inc., Juan was offered a supervisor position in the accountspayable department. His primary responsibilities were to review allof the purchase order matching exceptions and to supervise fiveassociates.
"Juan, what going on?" Sandy announced as he approached Juan'scubicle. Sandy sat down across from Juan.
6
"Hey, Sandy. What's up?" Juan said.
"Some V.P. at the L.A. printing site overnighted me an invoice anddemanded that I run it through ASAP," Sandy explained while tossingthe invoice across Juan's desk. Juan picked it up. "Can you postit?" Juan attempted to post the invoice, but it did not match anypurchase orders in the system.
"No P.O., Sandy." Juan looked up and saw Sandy's face starting toget red.
"What? You have got to be kidding me! He overnights me an invoiceand there's no P.O. in the system," Sandy blurted, looking pastJuan at the computer screen. "Well, just override it and I'll havea chat with our L.A. friend." Juan overrode the matching exceptionand posted the invoice for payment. Sandy grabbed the invoice andstomped back to his office.
Employee 4
Darlene Beau was primarily responsible for printing the afternooncheck run. She was hired only three months ago but had experiencewith the system Duarf, Inc. used to process payments. Knowing thecheck for this Designing Pluz invoice would require his signature,Sandy telephoned Darlene. Sandy explained to her that there wouldbe a special check in the afternoon run and, since it would requirehis signature, he would save her time by reviewing the voucherpackage himself. She willingly accepted and even thanked him forhis thoughtfulness.
Getting the check out the door
The check was printed, signed and mailed following the normaloperating procedures. However, it was mailed to a post office boxowned by Sandy and he deposited the $32,450 into his new businessaccount-"Designing Pluz."
Repeating the job
Although the money did help alleviate Sandy's financial pressures,he found himself wanting to try it again. He realized that with thefake Designing Pluz account already on the approved vendor list, hecould easily push another invoice through the process. Less thantwo weeks after the first phony invoice was paid, he attempted itagain.
Sandy created another Designing Pluz invoice for $12,945. He wascareful to keep the amount low enough that both checks combinedwould not stand out on the L.A. printing site's monthly budget foractual analysis. He decided to use different accounts payableassociates to process the payment but to tell the same story.
Employee 5
Rachel Nicki had been with Duarf, Inc. for two years. She was anassociate whose primary responsibility was processing supplyinvoices, such as paper, ink and press materials. Most people didnot know that she was married to one of Duarf, Inc.'s seniorinternal auditors
7
because she did not take his last name. Her husband had beenworking on implementing a fraud hotline for the company and spoketo her often about it.
"Rachel, I have a rush invoice here from the L.A. printing site.Are you busy?"
"No, not too busy. Hold on, just a second," Rachel said. Sandy hadinterrupted her in the middle of processing an invoice. Shefinished up with what she was doing and asked, "Why therush?"
"Some V.P. over there wants it processed ASAP. Here is hissignature." Sandy pointed to the invoice as he handed it to her.Rachel studied the invoice and the signature. She began to open theauthorization limits file on her computer, but Sandy stopped her."Rachel, I really don't have time for that now. He's a V.P."
"I'm sorry Sandy. I have to check him out to see if he's authorizedto approve invoices," Rachel explained, looking curiously at Sandy.She found the file and began to scan it for the name. She lookedback at the signature and asked, "Is this Sandman orZachvan?"
"Look, I appreciate your insisting on processing this by the book,but I really need this processed now. Take my word for it, he'sauthorized." Sandy said.
Somewhat shocked by what Sandy had said, Rachel began, "When Iprocess something, my initials are input into the data record and Idon't put my name on anything unless it's by the book." However,Sandy snatched the invoice and walked away before she couldfinish.
Two hours later, Rachel was still puzzled by Sandy's behavior. Shehad a funny feeling about that invoice and decided to call thecompany's fraud hotline. The operator was pleasant and let her knowshe could remain anonymous. The operator inquired about thesituation, then thanked her for the information. He explained thathe would recommend an internal review of the Designing Pluzvendor.
DISCOVERY Two months later, Rachel received a department-widee-mail saying that Sandy was leaving the company. The e-mail addedthat Sandy would be prosecuted for allegedly embezzling over$40,000.
