Question

Chapter 3 Case Study #3

ABC satellite, a satellite television company, sells satellite television service contracts to customers, usually for a 24-month period. ABC satellite is a fast-growing, high-paced company created by aggressive salesmen. The company’s success has made its owners very wealthy, many of them live a lavish lifestyle and drive luxury cars to work. The retention division of this company is responsible for contacting customers nearing the end of their contract and convincing the customer to renew their contract. Retention agents are paid a commission for each account that agrees to a new contract. The com-mission rate is considered by many employees to be below the industry standard. Over the past year, the retention division has undergone significant supervisor and manager turnover. The current manager has not had sufficient time or understanding to properly implement controls. Additionally, the new manager has been so busy playing catch up that he has yet to hold a training or orientation meeting for his department. The current process for paying commissions to retention agents on renewed accounts is as follows:

• The phone system records the verbal contract extension commitment.
• The retention agent attaches the audio recording to the customer’s account in the ABC customer contract system (CCS); this acts a legal proof of contract.
• The retention agent then updates the customer contract date information in CCS.
• Each retention agent has a spreadsheet he or she uses to keep track of the account renewals for the month.
• The retention agent records the customer #, date of contract extension, and length of contract extension in his or her spreadsheet.
• At the end of each month the retention supervisor receives each agent’s spreadsheet and multiplies the total retention renewals submitted by the agent by his or her commission rate in order to calculate the total monthly commission.
• The spreadsheets are not maintained by the supervisors.

• In order to get the payments processed quickly, the supervisors have less than four hours to receive all agents’ spreadsheets (usually each supervisor is responsible for 20+ agents) and submit the summary file to payroll.

• The supervisor records the total commission earned by each agent on a summarized spreadsheet, which is sent directly to payroll for payment.

1. Part of avoiding fraud is to create a positive work environment. Describe a few conditions mentioned within the case that could contribute to a poor work environment.

2. What symptoms should an auditor look for to determine if fraud is occurring within the retention department?

3. There are five primary control procedures or activities. List and explain which two procedures you feel would be most effective in improving the control system of the retention department. Include in your explanation specific examples of controls that should be implemented.

Answer 1

SOLUTION:- 1 First condition mentioned in the case is that Employees believe that commission structure is below par than Industry Average, this belief needed to be discussed and clarified with the group of employees by the supervisor which could not be done n this case. The working environment would have a negative impact this low level of interaction and pay structure. The supervisors are not maintaining the spreadsheets or a controlled data for Contract Renewal and are solely relying on the data provided by the retention agents. The monthly data provided by the retention agents are also not cross checked due to paucity of time with the supervisors. This is also an area where frauds can take place easily. a result of as

2 The symptoms than an Auditor should look for in determining whether fraud is occurring is to compare the revenue growth vis a vis growth with commission payments to the retention department. If new contracts are renewed with the same data as being provided by the retention agents than the revenue should have a direct impact. If the impact is not there or could not be established then a fraud has been committed by the retention department.

3. The two procedures according to me which will improve the control system of the retention department are as under a) There should be an immediate orientation meeting of the supervisor with his department employees discussing al the pressing issues related to the commission payment structure and improving the control mechanism of the department as a whole. b) The supervisor should take renewal data from the agents on the daily basis and the compilation should be done by him personally or an exclusive person who will only do this particular job, not the retention agents. The supervisor should also analyse how the revenues are shaping up given the renewals done by his department.
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