Question

About internal controls, and real-life examples such as Wal-Mart, WorldCom and Enron that led to fraud-prevention legislation.

Then, think about the business processes and procedures at your current or former workplace (or other situations you heard from your friends and family) that you believe constitute a violation of any of the six principles we learned. If you do not work and have not worked anywhere in the pasts, please feel free to think about what you observed around campus as you think about situations that amount of internal control violations.

Describe two such examples in a short paper. What would you do to correct those violations?

Please take care not to mention the names of the organizations for confidentiality; instead, describe the business processes that present opportunities for fraud via internal control violations.

Answer 1

Case Study 1 - Embezzlement Of Cash

In 2013,I used to work in an very famous Multi national company based in India. The matter involved an employee who had been working in the controllership division of the company's finance department for about three years till the theft was discovered in December last year.

Following are the facts of case;-

The employee who had been working in the controllership division of the company's finance department for about three years Who is incharge of handling finances of the company and had access to company's bank accounts and Passwords.

The employee is believed to have embezzled about $4 million by stealing a password and transferring money from one of comapny's bank accounts.

Based on the finding of the legal counsel, Audit council suggested that if corrections were to be carried out to the published annual financial results, in view of the "mis-statements identified during the probe", profit-after-tax for 2009-10 would have been higher by 2.1% or approximately $4 Million.

What are the Weakness in company's Internal Control System?

*mistakes were committed in accounting entries and that they were also not supported by any documents.

*Weaknesses identified related to sharing of online banking access passwords and comapny's internal accounting system passwords by certain employees within the finance and accounting departments, including those responsible for external financial reporting,

*The company admitted there was lack of effective controls over recording of journal entries, including inadequate documentation which resulted in ineffective controls over bank reconciliation statements.

*There was also insufficient segregation of duties with respect to recording and initiating banking payments.The samePerson who was making payments on behalf of comapny was also authorised for recording such tranactions in the books of company.

Measures that should be taken to detect and prevent Internal control failures:-

Duly laid down authorization Levels(segregation of duties with respect to recording and initiating banking payments).

Their should be proper reconciliation of bank accounts as well as relatively less operated/scrutinized accounts like outstanding liabilities, exchange rate fluctuations, inter-unit and company balances.

Their should be insistence of appropriate supports for accounting entries (like the journal entries that are recorded by debiting one account and crediting another)

If at all well-documented internal control  procedures and practices were in place, fraud would have been detected at earlier stages and Reputation of compnay might not be at a greater risk.

Case Study 2- Internal controls Violation In a Construction Company

Comapny is a holding company that furnishes a wide range of construction, fabrication, maintenance and engineering services to utilities, municipalities and other firms.

Facts of the case;-

Primoris is a holding company that furnishes a wide range of construction, fabrication, maintenance and engineering services to utilities, municipalities and other firms.

Much of its work is done on a percentage-of-completion basis. Under this method the firm projected the revenues earned using estimates for the value of its contracts and the total costs expected for the agreement.

In making these estimates Primoris often included a contingency for the risks inherent in the projects. Those included unanticipated costs caused by delays, design errors, subcontractor performance, supplier delays and similar items As the project went forward, and the risk of these errors reduced, the contingency would be adjusted and typically reduced.

That resulted in an increase in the percent completed and the revenue for the project. These calculations thus had a material impact on revenue recognition.

The firm identified this method of accounting as a significant accounting policy in its Form 10-K. Nevertheless, the company did not have written policies or procedures describing how contingencies should be estimated at the beginning of a project. It also did not have written policies directing how the in-progress adjustments should be made or specifying how the estimates should be adjusted as the project continued.

Equally problematic was the firm’s failure to sufficiently document its process for evaluating risks contained in the initial estimate. The firm’s processes suffered from the same deficiency for in-progress adjustments – they were not adequately documented.

These deficiencies resulted in difficulties. In december 2019 the firm learned that it had three accounting errors related to contingencies in one segment of its business. Those errors resulted in a failure to reduce contingent cost expectations and recognize revenue and profits in the appropriated quarter. Accordingly, the firm’s ability to make and keep accurate books and records regarding contingencies was impaired.

Measures that should be taken to detect and prevent Internal control failures:-

Company should comply with maintaining all the adequate documentation.

Company Should prepare it's Financial statements according to GAAP.The company must disclose material contingent liabilities or contigent assets that are possible or probable by adding a footnote to the financial statement.