Sara Chung knew the construction contractors in her area well. She was the purchasing manager at the power plant, a business that was the major employer in the region. Whenever a repair or maintenance job came up, Sara’s friends would inflate the invoice by 10%. The invoice would then be passed through the accounts payable department, where the clerk was supposed to review and verify the charges before processing the payment. The accounts payable clerk, Valerie Judson, was happy to have a job and didn’t want anything to jeopardize it. She knew the deal, but kept her mouth shut. Sara’s contractor friends would always “kick back” the 10% extra to Sara under the table. One day Valerie had a heart attack and went into the hospital. The company hired a new accounts payable clerk, Spencer Finn. He had worked construction in his college days and suspected something was fishy, but he couldn’t prove it. He did, however, wish to protect himself in case the fraud came to light.
Requirements
1. How could an auditor detect fraud of this sort?
2. What can a business do to prevent this kind of fraudulent activity?
3. What should the new accountant do to protect himself?