EX 8-15 Internal control of cash payments
Digit Tech Company, a communications equipment manufacturer, recently fell victim to a fraud scheme developed by one of its employees. To understand the scheme, it is necessary to review Digit Tech’s procedures for the purchase of services.
The purchasing agent is responsible for ordering services (such as repairs to a photocopy machine or office cleaning) after receiving a service requisition from an authorized manager. However, since no tangible goods are delivered, a receiving report is not prepared. When the Accounting Department receives an invoice billing Digit Tech for a service call, the accounts payable clerk calls the manager who requested the service in order to verify that it was performed.
The fraud scheme involves Loretta Trent, the manager of plant and facilities. Loretta arranged for her uncle’s company, Laser Systems, to be placed on Digit Tech’s approved vendor list. Loretta did not disclose the family relationship.
On several occasions, Loretta would submit a requisition for services to be provided by Laser Systems. However, the service requested was really not needed, and it was never performed. Laser Systems would bill Digit Tech for the service and then split the cash payment with Loretta.
Explain what changes should be made to Digit Tech’s procedures for ordering and paying for services in order to prevent such occurrences in the future.
Answer:
To prevent the fraud scheme described, Digit Tech must separate responsibilities for related operations. As in the past, all service requisitions should be submitted to the Purchasing Department. After receiving the service request, Purchasing should complete a Service Verification form, stating what service has been ordered and the name of the company that will provide the service. This form should be delivered via intercompany mail to the person responsible for verifying that the service was performed. This person should be someone who has firsthand knowledge of whether the service has been performed. This person, who must be someone other than the manager requesting the service, should fill in the date and time the service was received and sign the form. In addition, the vendor providing the service should sign the form before leaving the premises. When completed, the Service Verification form should be forwarded to the Accounting Department. Accounting will authorize payment of the vendor’s invoice after the Service Verification form has been compared with the invoice.
The purchasing agent is responsible for ordering services (such as repairs to a photocopy machine or office cleaning) after receiving a service requisition from an authorized manager. However, since no tangible goods are delivered, a receiving report is not prepared. When the Accounting Department receives an invoice billing Digit Tech for a service call, the accounts payable clerk calls the manager who requested the service in order to verify that it was performed.
The fraud scheme involves Loretta Trent, the manager of plant and facilities. Loretta arranged for her uncle’s company, Laser Systems, to be placed on Digit Tech’s approved vendor list. Loretta did not disclose the family relationship.
On several occasions, Loretta would submit a requisition for services to be provided by Laser Systems. However, the service requested was really not needed, and it was never performed. Laser Systems would bill Digit Tech for the service and then split the cash payment with Loretta.
Explain what changes should be made to Digit Tech’s procedures for ordering and paying for services in order to prevent such occurrences in the future.
Answer:
To prevent the fraud scheme described, Digit Tech must separate responsibilities for related operations. As in the past, all service requisitions should be submitted to the Purchasing Department. After receiving the service request, Purchasing should complete a Service Verification form, stating what service has been ordered and the name of the company that will provide the service. This form should be delivered via intercompany mail to the person responsible for verifying that the service was performed. This person should be someone who has firsthand knowledge of whether the service has been performed. This person, who must be someone other than the manager requesting the service, should fill in the date and time the service was received and sign the form. In addition, the vendor providing the service should sign the form before leaving the premises. When completed, the Service Verification form should be forwarded to the Accounting Department. Accounting will authorize payment of the vendor’s invoice after the Service Verification form has been compared with the invoice.
