Question

circumstad occoud Jowo esord Jovole Revelw w - Fraud Case 8-1 Dylan worked for a propane gas distributor as an accounting clerk in a small Midwest- ern town. Last winter, his brother Mike lost his job at the machine plant. By January, temperatures were sub-zero, and Mike had run out of money. Dylan saw that Mike's account was overdue, and he knew Mike needed another delivery to heat his home. He decided to credit Mike's account and debit the balance to the parts inventory because he knew the parts manager, the owner's son, was incompetent and would never notice the extra entry. Months went by, and Dylan repeated the process until an auditor ran across the charges by chance. When the owner fired Dylan, he said, "If you had only come to me and told me about Mike's situation, we could have worked something out." Requirements 1. What can a business like this do to prevent employee fraud of this kind? 2. What effect would Dylan's actions have on the balance sheet? The income statement 3. How much discretion does a business have with regard to accommodating hardship situations?

Answer 1

(1): A business like this can prevent employee fraud of this kind by putting in place proper internal control measures. Internal control is a process which helps an organization achieve its objectives toward operational efficiency and effectiveness. Internal control helps in risk mitigation by detecting and preventing fraud.

In this case there should a proper segregation and duties and responsibilities accompanied by proper monitoring by a supervisor. Dylan, as an accounting clerk, was responsible for both inventories as well customer accounts. This should be changed and responsibilities should be segregated so that a clerk is not able to commit a fraud. Secondly regular monitoring and supervision should be done.

(2): In the balance sheet the inventory amount on the asset side increased and at the same time receivables amount on the asset side decreases by the same amount. Thus there was no change in the total amount of balance sheet and just that receivables balance of Mike was removed and transferred to inventory account. There was no impact on the income statement of this entry as no revenue or expense amount was affected.

(3): A business can have certain amount of discretion with regards to accommodating hardship situations. However it should allow such cases only if its business and operations are not systematically affected and that the provisions for hardship situations are rare and one-off cases and instances.