SOLUTION:Part of management’s philosophy and operating style should be the creation of an organizational culture that stresses integrity and commitment to ethical values and competence. In doing so, management should develop clearly stated human resource standards and policies that explicitly describe honest and dishonest behaviors, often in the form of a written code of conduct (methods of assigning authority and responsibility), and communicate them to employees.
These policies should especially cover issues that are uncertain or unclear, such as conflicts of interest and the acceptance of gifts. For example, most purchasing agents would agree that accepting a $5,000 bribe from a supplier is dishonest, but a weekend fishing trip or clothing is not as clear-cut. The observations in the purchasing department indicated that there could be a problem with favoring certain vendors.
7.2 Explain how the principle of separation of duties is violated in each of the following situations. Also, suggest one or more procedures to reduce the risk and exposure highlighted in each example. a. A payroll clerk recorded a 40-hour workweek for an employee who had quit the previous week. He then prepared a paycheck for this employee, forged her signature, and cashed the check. PROBLEM: Segregation of duties is violated here because the payroll clerk had the ability to record time worked and to prepare the payroll check (custody). This allowed the payroll clerk to both commit and conceal the fraud. The payroll clerk ignored the authorization process or had the authority to authorize the payment.
SOLUTION: These three functions should be segregated. One person should authorize payments, another should record the payments, a third should prepare the check, and a fourth should sign it.
b. While opening the mail, a cashier set aside, and subsequently cashed, two checks payable to the company on account. PROBLEM: The cashier who opened the mail had custody of the cash. The cashier opening the mail can pocket the checks and forge a signature, never giving the authorized endorser a chance to be involved. For this reason, many companies have the mail opened by two people or have those opening the mail videotaped.
SOLUTION: While the cashier can get away with this fraud for a few weeks or months, the missing checks will eventually be noticed – usually when the customer complains – because the cashier has no way to conceal the fraud (recording function). An investigation would include an examination of the stolen checks and that could lead to the cashier as the person cashing the checks. To be successful in the long term, the cashier needs access to the recording function to indicate that customer accounts are paid so that their complaints do not start an investigation.
c. A cashier prepared a fictitious invoice from a company using his brother-in-law’s name. He wrote a check in payment of the invoice, which the brother-in-law later cashed. PROBLEM: Segregation of duties is violated here because the cashier had the ability to both write the check (custody) and approve the invoice for payment (authorization).
SOLUTION: The functions of authorizing invoices for payment and preparing checks for signature should be organizationally independent.
An employee of the finishing department walked off with several parts from the storeroom and recorded the items in the inventory ledger as having been issued to the assembly department.
