Question

dudles Levon Helm was a kind of one-man mortgage broker. He would drive around Ten- nessee looking for homes that had second mortgages, and if the criteria were favor- able, he would offer to buy the second mortgage for "cash on the barrelhead." Helm bought low and sold high, making sizable profits. Being a small operation, he employed one person, Cindy Patterson, who did all his bookkeeping. Patterson was an old family friend, and he trusted her so implicitly that he never checked up on the led- gers or the bank reconciliations. At some point, Patterson started "borrowing" from the business and concealing her transactions by booking phony expenses. She intended to pay it back someday, but she got used to the extra cash and couldn't stop. By the time the scam was discovered, she had drained the company of funds that it owed to many of its creditors. The company went bankrupt, Patterson did some jail time, and Helm lost everything hes Requirements 1. What was the key control weakness in this case? 2. Many small businesses cannot afford to hire enough people for adequate separa- tion of duties. What can they do to compensate for this?

Answer 1

Answer to Question 1

1. The key control weakness in this case was lack of a very important internal control known as Segregation of Duties.
2. Segregation of duties is the process of assigning different responsibilities to different people like

• Authorization and approval;
• Recording/Accounting;
• Reconciliation and review and so on.

In simpler words, it is also called as Separation of duties or Division of duties.

Advantages of Segregation of duties include:

• Higher accountability
• Fewer errors and faster detection of errors
• Higher productivity of output due to balanced workload
• Positive work environment

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Answer to Question 2

• Segregation of duties, by definition requires a number of people for different duties.
• Many small businesses cannot afford to hire enough people for adequate separation of duties.
• This can be compensated by not delegating certain tasks to lower-level employees to retain a strong hold on internal control. Examples of such tasks include Authorization for transactions exceeding a certain amount, entering into contracts.
• Major transactions should be authorized by at two levels- executive and senior level/by owner.
• Periodic review and reconciliation by the owner is critical in such businesses to avoid misappropriation, theft or fraud of assets. Oversight and review is often neglected in small organisation due to high involvement of owners at operational level.