Case 1 WHODUNIT? Who is the perpetrator? From the facts given in the case, it can be clearly deduced that Debbie Jones is the perpetrator. She has access to both assets and accounts which gives her the opportunity to commit and conceal the fraud. Also, she is the one who updates and maintains the accounts receivable records enabling her to tamper with the existing files. Apart from this, fraud occurred 6 months after she started working for the company, and her responses to the inquiries (check stamps, order of payments) were questionable. How she did it?
One unusual characteristic of the crabmeat industry in the town in Maryland is that the selling price was set at the beginning of the year and all customers order the same quantity of crabmeat; thus, the weekly invoice of each customer was for the same amount. In addition, manual sales invoices which were not pre-numbered were produced when orders were taken. All these business practices allowed the perpetrator to commit lapping. In this situation, Debbie stole the check for one sale and concealed the theft by not recording the preceding sale (this explains why the sales 2 transaction was not found in the computer file. The stolen check was then stamped with the company’s name and city rather than the usual ‘for deposit only. ’ This was done so Debbie could withdraw the cash for herself rather than depositing it to the company account. When the auditor began to question the missing transaction and right after overhearing Susan and the auditor’s conversation, Debbie attempted to correct the A/R file by hastily adding the May 10 payment. To prevent further scrutiny of the records, Debbie caused the crash of the computer 30 seconds later after showing the customer accounts.
To make her story more believable, she presented deposit ticket showing the checks listed including the check that the customer said that was sent five minutes later. This deposit ticket was obviously fake because it was not stamped by the bank and the breakdown did not add up to the total at the bottom. In the end, Debbie was successful in perpetrating the fraud because she made Susan believe that everything was caused by the program malfunction. Issues and Recommendations Issues| Recommendations| 1. Manual sales invoice are not pre-numbered.
Therefore, tracing the source documents for each transaction for verification would be extremely difficult. | 1. Invoices should be pre-numbered so that missing transactions records could easily be identified. | 2. No segregation of duties – The same person is assigned to: a. Record the checks to database and make bank deposits b. Summarize and run the A/R program c. Bill customers and prepare checks | 2. Authorization, execution, recording and custody functions should be assigned to different personnel. This would prevent the individuals from committing fraudulent activities.
As more individuals are involved, concealing the act becomes harder to accomplish and collusion becomes necessary. | 3. No mechanism for counterchecking records makes the company records more prone to errors. | 3. Compare computer records with source documents at hand to ensure accuracy and completeness. Source documents such as the billing should be regularly sent to external entities. | 4. An individual has full access to company records and computer programs. Therefore, he or she can easily alter amounts and other details of transactions. 4. Different personnel should handle the control account and subsidiary records so that discrepancies could be detected and investigated. Passwords should be used to restrict access to prevent unauthorized manipulation and tampering of records. | 5. The company’s lack of personnel has prevented key functions from being assigned to different individuals. | 5. To compensate for the lack of personnel in the company, Susan or John should closely supervise Debbie and Tommy. This close supervision would deter execution of fraudulent schemes. | 6.
Use of cash for payroll payments makes it harder to track salary distributions to employees. | 6. Instead of distributing cash each week to employees, the company should issue checks for payment of payroll expenses since cash is easier to misappropriate than checks. | 7. The company’s use of microcomputers for all transactions makes it exposed to risks of system failures. | 7. The company should invest in more advanced technology that can process large amounts of information to reduce possibility of malfunctioning due to overload. Back-up files should be created to ensure that despite crashes, data is still available for use. |