Accounting information system :
The following facts relate to an actual embezzlement case. Someone stole more than $40,000 from a small company in less than two months. Your job is to study the following facts, try to figure out who was responsible for the theft, how it was perpetrated, and (most important) suggest ways to prevent something like this from happening again. Facts Location of company: a small town on the eastern shore of Maryland. Type of company: crabmeat processor, selling crabmeat to restaurants located in Maryland. Characters in the story (names are fictitious): _ John Smith, president and stockholder (husband of Susan). Susan Smith, vice president and stockholder (wife of John). Tommy Smith, shipping manager (son of John and Susan). Debbie Jones, office worker. She began working part-time for the company six months before the theft. (At that time, she was a high school senior and was allowed to work afternoons through a school internship program.) Upon graduation from high school (several weeks before the theft was discovered), she began working full-time. Although she is not a member of the family, the Smiths have been close friends with Debbie's parents for more than 10 years.
Accounting Records
All accounting records are maintained on a microcomputer. The software being used consists of the following modules:
1. A general ledger system, which keeps track of all balances in the general ledger accounts and produces a trial balance at the end of each month.
2. A purchases program, which keeps track of purchases and maintains detailed records of accounts payable.
3. An accounts receivable program, which keeps track of sales and collections on account and maintains individual detailed balances of accounts receivable.
4. A payroll program. The modules are not integrated (that is, data are not transferred automatically between modules). At the end of the accounting period, summary information generated by the purchases, accounts receivable, and payroll programs must be entered into the general ledger program to update the accounts affected by these programs. Sales The crabmeat processing industry in this particular town was unusual in that selling prices for crabmeat were set at the beginning of the year and remained unchanged for the entire year. The company's customers, all restaurants located within 100 miles of the plant, ordered the same quantity of crabmeat each week. Because prices for the crabmeat remained the same all year and the quantity ordered was always the same, the weekly invoice to each customer was always for the same dollar amount. Manual sales invoices were produced when orders were taken, although these manual invoices were not pre numbered. One copy of the manual invoice was attached to the order shipped to the customer. The other copy was used to enter the sales information into the computer. When the customer received the order, the customer would send a check to the company for the amount of the invoice. Monthly bills were not sent to customers unless the customer was behind in payments (that is, did not make a payment for the invoiced amount each week). Note: The industry was unique in another way: many of the companies paid their workers with cash each week (rather than by check). Therefore, it was not unusual for companies to request large sums of cash from the local banks. When Trouble Was Spotted Shortly after the May 30 trial balance was run, Susan began analyzing the balances in the various accounts. The balance in the cash account agreed with the cash balance she obtained from a reconciliation of the company's bank account. However, the balance in the accounts receivable control account in the general ledger did not agree with the total of the accounts receivable subsidiary ledger (which shows a detail of the balances owed by each customer). The difference was not very large, but the balances should be in 100 percent agreement.
At this point, Susan hired a fraud auditor to help her locate the problem. In reviewing the computerized accounts receivable subsidiary ledger, the auditor noticed the following:
1. The summary totals from this report were not the totals that were entered into the general ledger program at month-end. Different amounts had been entered. No one could explain why this had happened.
2. Some sheets in the computer listing had been ripped apart at the bottom. (In other words, the listing of the individual accounts receivable balances was not a continuous list but had been split at several points.)
3. When an adding machine tape of the individual account balances was run, the individual balances did not add up to the total at the bottom of the report. Susan concluded that the accounts receivable program was not running properly. The auditor's recommendation was that an effort be made to find out why the accounts receivable control account and the summary totals per the accounts receivable subsidiary ledger were not in agreement and why there were problems with the accounts receivable listing. Because the accounts receivable subsidiary and accounts receivable control account in the general ledger had been in agreement at the end of April, the effort should begin with the April ending balances for each customer by manually updating all of the accounts. The manually adjusted May 30 balances should then be compared with the computer-generated balances and any differences investigated. After doing this, Susan and John found several differences. The largest difference was the following: Although they found the manual sales invoice for Sale 2, Susan and John concluded (based on the computer records) that Sale 2 did not take place. The auditor was not sure and recommended that they call this customer and ask him the following:
1. Did he receive this order?
2. Did he receive an invoice for it?
3. Did he pay for the order?
4. If so, did he have a copy of his canceled check?
Although John thought that this would be a waste of time, he called the customer. He received an affirmative answer to all of his questions. In addition, he found that the customer's check was stamped on the back with an address stamp giving only the company's name and city rather than the usual ''for deposit only'' company stamp. When questioned, Debbie said that she sometimes used this stamp. Right after this question, Debbie, who was sitting nearby at the computer, called Susan to the computer and showed her the customer's account. She said that the payment for $5,000 was in fact recorded in the customer's account. The payments were listed on the computer screen like this:
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Amount
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Date of Payment
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|
$5,000
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May 3
|
|
$5,000
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May 17
|
|
$5,000
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May 23
|
|
$5,000
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May 10
|
The auditor questioned the order of the payments-why was a check supposedly received on May 10 entered in the computer after checks received on May 17 and 23? About 30 seconds later, the computer malfunctioned and the accounts receivable file was lost. Every effort to retrieve the file gave the message ''file not found.'' About five minutes later, Debbie presented Susan with a copy of a bank deposit ticket dated May 10 with several checks listed on it, including the check that the customer said had been sent to the company. The deposit ticket, however, was not stamped by the bank (which would have verified that the deposit had been received by the bank) and did not add up to the total at the bottom of the ticket (it was off by 20 cents). At this point, being very suspicious, the auditor gathered all of the documents he could and left the company to work on the problem at home, away from any potential suspects. He received a call from Susan about four hours later saying that she felt much better. She and Debbie had gone to RadioShack (the maker of their computer program) and RadioShack had confirmed Susan's conclusion that the computer program was malfunctioning. She and Debbie were planning to work all weekend reentering transactions into the computer. She said that everything looked fine and not to waste more time and expense working on the problem. The auditor felt differently. How do you feel?
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Performance of Key Functions by Individual(s)
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|
Individual(s) Performing Task
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|
Most of the Time
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Sometimes
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|
1. Receiving order from customers
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John
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All others
|
|
2. Overseeing production of crabmeat
|
John or Tommy
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-
|
|
3. Handling shipping
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Tommy
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John
|
|
4. Billing customers (entering sales into accounts receivable program)
|
Debbie
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Susan
|
|
5. Opening mail
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John
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All others
|
|
6. Preparing bank deposit tickets and making bank deposits
|
Susan or Debbie
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All others
|
|
7. Recording receipt of cash and checks (entering collections of accounts receivable into accounts receivable program)
|
Debbie
|
Susan
|
|
8. Preparing checks (payroll checks and payments of accounts payable)
|
Susan or Debbie
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-
|
|
9. Signing checks
|
John
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-
|
|
10. Preparing bank reconciliations
|
John
|
-
|
|
11. Preparing daily sales reports showing sales by type of product
|
Susan
|
-
|
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12. Summarizing daily sales reports to obtain monthly sales report by type of product
|
Susan or Debbie
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-
|
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13. Running summaries of AR program, AP program, and payroll program at month-end and inputting summaries into GL program
|
Susan or Debbie
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-
|
|
14. Analyzing trial balance at month-end and analyzing open balances in accounts receivable and accounts payable
|
Susan
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-
|
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CUSTOMER ACCOUNT PER MANUAL RECONSTRUCTION
|
|
Dr.
|
Cr.
|
|
Sale 1
|
5,000
|
Pmt. #1
|
5,000
|
|
Sale 2
|
5,000
|
Pmt. #2
|
5,000
|
|
Sale 3
|
5,000
|
Pmt. #3
|
5,000
|
|
Sale 4
|
5,000
|
|
|
|
Ending Balance
|
5,000
|
|
|
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CUSTOMER ACCOUNT PER MANUAL RECONSTRUCTION
|
|
Dr.
|
Cr.
|
|
Sale 1
|
5,000
|
Pmt. #1
|
5,000
|
|
Sale 2
|
5,000
|
Pmt. #2
|
5,000
|
|
Sale 3
|
5,000
|
Pmt. #3
|
5,000
|
|
Ending balance
|
0
|
|
|
Required
a. If you were asked to help this company, could you conclude from the evidence presented that embezzlement took place? What would you do next?
b. Who do you think was the embezzler?
c. How was the embezzlement accomplished?
d. What improvements would you recommend in internal control to prevent this from happening again? In answering this question, try to identify at least one suggestion from each of the six classes of internal control activities discussed in this chapter (in the Control Activities section): transaction authorization, segregation of duties, supervision, accounting records, access control, and independent verification.
e. Would the fact that the records were maintained on a microcomputer aid in this embezzlement scheme?