Case 4: Small Business: Inventory, Accounts Receivable, and Accounts Payable Risks Implementing Anti-Fraud Controls

Mr. Gustafson, the owner of the body shop, has been in business for five years. His business has been growing steadily for the past two years. He believes that he will have to hire more employees before the end of the year to be able to have all vehicles brought into the shop repaired and delivered to the customers in a timely manner. He also wants to address some accounting issues pointed out by a friend who is an auditor, specifically, the lack segregation of duties in Mr. Gustafsons small business. Therefore, Mr. Gustafson would like to evaluate his staff and their duties so he can assess whether he needs to hire more people or simply needs to reorganize their duties/tasks. He has five employees. Three of them work in the shop: the painter, the body repairman and the helper. The other two employees work in the office. One of the office employees is responsible for duties related to accounts payable and the other is responsible for duties related to accounts receivable. Mr. Gustafson is aware of the issues that can arise from having one person in control of tasks that may overlap. However, given that he has only five employees, he has divided the tasks as follows:

George, the painter gives estimates and enters the sales orders into the system. He has also the ability to override any prices because when he inspects a vehicle, he can identify the extent of the damage accurately. However, every time he changes the prices he gets approval from the owner, but this is usually done after the fact, as the owner has other body shop locations and is not available all the time.

Ronald, the body repairman creates the purchase orders for all the materials that are needed to repair the vehicles; he also receives all the materials needed to perform the repairs. As a favor to the owner, he discards of all the scrap metal such as fenders, bumpers and any other damaged parts removed from the damaged vehicles.

Christian, the all-around helper is in charge of inventory and is allowed to make adjustments to prices or quantities as necessary in the inventory records. Because Mr. Gustafson has been advised by his auditor friend that someone should sign off on any adjustment transactions to the inventory, he has decided to review all the paperwork once the physical count of inventory has taken place and the adjustments are made. After his review, Mr. Gustafson approves/initials the inventory adjustment transactions.

Jere, the Accounts Receivable clerk updates the customer master file by entering new customer data, creating the customer invoices, issuing credits memos and/or voiding/canceling any invoices as necessary. She also collects payments from customers and insurance companies, depositing these collections daily at the bank. She has also custody of the petty cash, and performs the reconciliations of petty cash and the bank account.

Henry, the Accounts Payable clerk updates the vendor master file and enters new vendor data, receives vendor invoices and codes them for payment. Once invoices are reviewed by the owner, Henry vouches (compares) them with related receipts and applies any received discounts/credits. Henry issues invoices due for payment every two weeks. The owner reviews and signs all checks.

Case 4: Questions

1. Identify and list any potential red flags/risks that may contribute or make it easier to commit fraud.

2. Recommend solutions to correct and/or reduce the risks discussed in the previous question