Internal control of cash payments Obj. 2, 3
Paragon 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
Paragon’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,
because no tangible goods are delivered, a receiving report is not prepared. When the Accounting
Department receives an invoice billing Paragon 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 Mae Jansma, the manager of plant and facilities. Mae arranged for
her uncle’s company, Radiate Systems, to be placed on Paragon’s approved vendor list. Mae did not
disclose the family relationship.
On several occasions, Mae would submit a requisition for services to be provided by Radiate.
However, the service requested was really not needed, and it was never performed. Radiate would
bill Paragon for the service and then split the cash payment with Mae.
Explain what changes should be made to Paragon Tech Company’s procedures for ordering
and paying for services in order to prevent such occurrences in the future.AppendixLO1