Question

Amanufacturing plant was finding a huge increase in the scrapping of raw materials. Its internal controls were reviewed and the plant appeared to be strong; segregation of duties was in place. As the accountant was reconciling some inventory accounts, she found more than a normal amount of scrap tickets. The tickets were for scrapping the same inventory part, signed by the same person, and the scrap was sold to only one company. The inventory item was still being ordered and only one supplier was used to purchase the parts. After further investigation by the accountant, the company buying the inventory and the company selling the inventory to the company had different names but shared the same address. Required: Comment on what went wrong. What happened to the internal controls the company had in place?

Answer 1

The company's inventory is scrappped even the inventory is usable in production process.This was a part of internal collusion of some or the employees. These employees are purchasing and selling the same material from single person.This seems a planned collusion where production manager along quality manager and purchase manager have colluded for this internal fraud.

Internal controls cannot be said to be implemented merly by  framing it,For a successful implementation these internal controls must be operated effieciently.Internal controls is part of a process where framing of it,implementing of it and successfully operating of it works cummulatively.

In the given case proper checks have been established in the various processes but the effectiveness of these checks are questionable.When this type of collusion is happened then one should expect that all the internal control's effectivity is likely to be distroyed by this plaaned cartel.

On the part of higher mangement one can revisit its existing controls and establish some enhanced checks on the doubtful departments.In the given case the company should either replace the purchase manager or transfer such manager fron this loacation because once collusion with supplier is made then, these relations may be carry forwarded to nearest future.

In the conclusion it can be said that internal controls exist but lack in implementation of these internal controls has led to situation like this.

Let me share you with a situation which I have personally dealth with similar to this.A listed company has established their new plant of grinding the clinker to process the cement in india.Where whole plant was procured from jermany but after successfull establishment of plant,there was remaing tons of unaccounted scrap in scrap yard. I asked the store manager why it is not accounted, he replied this is not measured in term of weight hence cannot be accounted for.

Then I checked the reocrds of scrap sale where I found the same person to quote for scrap from two different name.I said to security officer that I have got evidence of your collusion in the existing scrap sale, then he accepted that it was happening since establishment of plant.

I reported it in my internal audit report,then my boss had some of the issue with these reports,So they painted some of them by sorting my report. Overall in next audit of same plant we got to know that everybody in the plant was involved.but some extra checks were implemented by the company.

Please coment for any explantion.

Thanks