Question

Johnson Computers repairs computers, along with selling and installing software on computers. Brian handles the repairs for the computers and is constantly asked by family and friends for assistance when they experience computer issues. In an effort to provide more personal income, Brian started doing repairs from his home on weekends and evenings, as a part-time venture. As most of the business is for family and friends, he does not want to charge as much as Johnson Computers does. During the budget process, Brian increased the budget for computer parts, and once approved, started to buy as many as the budget would allow. For the additional parts not needed by Johnson Computers, Brian took the parts home to use in his business. Brian makes sure the amount spent never exceeds the budgeted amount. Explain how Brian’s use of the budget is considered fraudulent, and how the budget process should have found this issue. What policies and procedures should Johnson Computers have in place to protect the business assets and prevent the business risk?

Answer 1

Brian’s use of the budget is considered fraudulent. Fraud is a behavior that is corrupt or unethical. Fraudulent activity is usually motivated by either pressure , opportunity,or rationalization . Opportunity is the element that every business should be seeking to reduce.Here Brian used his position to indulge in fraud activities by increasing the budget of the number of the parts required by Johnson Computers so that he can use the extra parts in the stock for his personal business that he runs at home. He very smartly increased the  budget for computer parts, and once approved, started to buy as many as the budget would allow. For the additional parts not needed by Johnson Computers, he took the parts home to use in his business. He made sure the amount spent never exceeds the budgeted amount.

According to me budget process should have found this issue as usually budget is prepared by the management keeping in mind the requirements for the future. Management should have reviewed the requirement by checking the past trends , and accordingly see the expected demand.When Brian proposed to increase the budget amount management should have made a inspection about the increased demand before approving the budget proposed.

As we say prevention is better than cure. This is true when considering how to manage the risk of employee fraud. Business should place effective internal controls . Like:

• Do not approve any budget without completely cross checking it.
• occasionally verify all the stock needed by the company this will help in eliminating the stock not needed by the company.
• prepare and carefully review monthly financial statements in sufficient detail to disclose significant variances from prior year or budget;
• Keep evaluating all the internal control. This will help in seeing whether the applied controls are effective or not.
• Documentation is very important . This will keep a check on fraud. Maintain adequate supporting documentation for all the purchase.
• Support documents should be reviewed for reasonableness and reconciled by someone other than the purchaser. Reconciliation should be performed in a timely manner by somebody who is has knowledge of department activities. Purchasing duties should be delegated to staff, with management approving and reviewing all purchase activity.
• Store log should be inspected at proper intervals so that movement of inventory should be tracked.