Case stupdy from business environment

21 Case 4: Fraud Schemes and Internal Controls 22 Potential Fraud Scheme Internal Control The store only has one credit card machine located in between the two cash registers. Documentation - Transactions could get mixed up between the two cash registers: have a credit card machine for each cash register. Running two different purchases at the same time could allow for an employee to steal money: have proper documentation for theft prevention. If the credit card machine fails, there is no way to track transactions/ inflow or outflow of money: have an alternate system of documentation in addition to the credit card machine and two cash registers. Every single employee has their own access code to both registers, increasing the risk of possible errors or discrepancies during transactions. Access Controls - Limit the number of workers with access to the registers and/or assign employees to certain registers that they can use. Check the accounting software to identify any variances under specific users. Employees can steal inventory. Physical Audits - The store should perform a physical inventory count once a month (or after a certain period of time) and compare physical inventory with recorded inventory. Employees could alter the amount of cash removed from the cash registers so that the amount of money on the receipts and the amount removed from the register do not match up. Reconciliations - Reconcile the register tape with the store sales receipts. The amount of cash and credit sales should equal the amount of the register and store sales receipts. Also take a physical count of money totals in each cash register at the end of each day. Lucy has the ability to incorrectly record the daily sales and take money from the register. Separation of Duties - One employee should monitor Lucy while she records daily sales. Another employee should evaluate Lucy's documentation for any errors. Alternatively, one employee should record the sales and another employee should prepare the bank deposits. Electronic cash registers could be hacked from an outside source. No employee has a key to the register, leaving it vulnerable to outside access. Access Controls - More security is required for the cash registers. Additional passwords and theft protection software is needed. Lucy and Kayla should have keys to the registers for managerial duties. Each time one of them opens a register, another employee must be present to monitor their activity. 23 Lucy has the ability to steal from the store when dealing with small customer issues. She is able to falsify refunds for customers that do not exist. Separation of Duties - One employee should deal with the customer issue while another employee issues the refund or new product. Because the clerks have full authority to perform all types of transactions, they are able to create fake returns and steal money from the register. Physical Audits - Performing regular physical inventory examinations would help prevent employees from stealing from the store. Only authorize certain employees to perform certain transactions. Every single employee works on Saturday; each has the ability to collude with another employee on this day. Separation of Duties - Each employee needs to rotate shifts and work with different employees every day of the week that he/she works. Lucy has her own locked office. She could conceal fraudulent behavior more easily than the other employees. Her office is located in the back of the store away from other employees and customers. Access Controls - Lucy should have video or other surveillance installed in her office. She should have windows that allow visible access into her office. Kayla should have a key to Lucy's office to monitor her actions. Lucy prepares the bank deposits and records daily sales. Separation of Duties - Kayla should examine and approve bank deposits and daily sales before they are completed in order to minimize fraud. Advertising expenses could have been overstated and an employee could have pocketed the extra funds. Documentation - Employees should be required to document every single transaction to the exact dollar amount that pertains to advertising and promotion. Kayla should check these transactions with the physical product. Clerks are able to use coupons every time they purchase inventory from the store and can steal the difference from the register. Authority Approval - Lucy or Kayla should be the only ones that can approve discounts and coupons with a unique code. If there is a large number of coupons, the coupons should be required to be scanned in before the sale and collected to show the customer the total that he/she owes. As seen in the anonymous note left on her desk, Kayla leaves her office unlocked. Employees can steal money or inventory from her office. Access Controls - Kayla should install office doors that automatically lock when they shut. This would prevent anonymous people from walking undetected into Kayla's office. Alternatively, Kayla should practice locking her door every time she leaves her office. 24 Employees are able to steal cash from the register during the day without Kayla knowing exactly which employee stole the cash. Access Controls - Employees should be required to close out their cash box at the end of their shift at a particular register. This would show who is responsible if money goes missing. Employees should be required to only work on one register during his/ her shift, and each cash register should only be used by one employee each shift. Additional Potential Fraud: If Kayla (the owner) is a potential suspect. Kayla, acting as the owner of her store, also has the opportunity to steal from herself. Her ownership position would offer a good cover-up for committing fraud. She has her own office in the back of the store that only she has access to. She also has ultimate authority over the perpetual inventory records and inventory orders, she pays bills, handles payroll, takes deposits to the bank, and reconciles bank statements. She could easily steal from her business if she wanted to because she does not separate her powers, nor does she have anyone check all of the bank reconciliations that she deposits herself. Although Lucy prepares the bank deposits, Kayla could make new ones and deposit those without any approval or oversight from other employees. She also has overall control over the internal accounting system, so she could easily adjust the inventory, deposits, sales, returns, etc. in order for her to steal whatever she wants. As mentioned earlier, Kayla also has her own locked office in the back where she could hide the evidence of her theft and conspire to steal more

70. The market risk premium is the difference between the historical return on the stock

market and the risk-free rate, for every year. Why is it negative for some years?

71. Is it correct to use in the valuation of the shares of a company the "value of the real

net assets" which, according to the Institute of Accounting and Auditing (ICAC),

represents the "book value of shareholder's equity, corrected by increases or

decreasing in value which could be demonstrated, in the case of the goods, rights and

obligations of the company at the reference date?"

72. Is it correct to say that the value of the shares is the "value of the results'

capitalization" which, according to the Institute of Accounting and Auditing (ICAC)

represents "the sum of the expected future results of the company during a certain

period, discounted at the moment of the valuation?"

73. Is it true that a company creates value for its shareholders during a year if it

distributes dividends or if the quotation of the shares increases?

74. The ROE (Return on Equity) is the ratio between net income and Shareholders' equity.

The meaning of ROE is return to shareholders. Consequently, is ROE a correct

measurement of the return to shareholders?

6 - IESE Business School-University of Navarra

75. Regarding the WACC that has to be applied to a project, should it be an expected

return, an opportunity cost or the average historical return on similar projects?

76. Could we assume that, as we cannot predict the future evolution of the value of shares,

a good approximation would be to consider it constant during the next five years?

77. The reasonable thing to do is to finance current assets (collections, inventories...) with

short-term debt, and fixed assets with long-term debt. Is this correct?

78. Is the market risk premium a parameter for the national economy or for the world

economy?

79. The market risk premium is the difference between the historical return on the stock

market and the return on bonds. But how many years does "historical" imply? Shall

we use the arithmetic mean or the geometric one?

80. We are valuing a company, a lot smaller than ours, in order to buy it. As that

company is a lot smaller than ours it will have no influence on the capital structure

and on the risk of the resulting company. This is the reason why I believe that the beta

and the capital structure which are relevant to the valuation of the company we are

analyzing are the ones of our company. Am I right?

81. Our company (A) is going to buy another company (B). We want to value the shares of

B and, therefore, we will use three alternatives of the structure Debt/Shareholders'

Equity so as to obtain the WACC: 1) present structure of A; 2) present structure of B,

and 3) structure used by A to finance the acquisition of B's shares. We will value the

company B by applying these three alternatives and then take as a reference the

average of the results. Is this correct?

WACC, is the weighting of the debt and the shares done with

book values of debt and shareholder's equity or with market values?

70. The market risk premium is the difference between the historical return on the stock

market and the risk-free rate, for every year. Why is it negative for some years?

71. Is it correct to use in the valuation of the shares of a company the "value of the real

net assets" which, according to the Institute of Accounting and Auditing (ICAC),

represents the "book value of shareholder's equity, corrected by increases or

decreasing in value which could be demonstrated, in the case of the goods, rights and

obligations of the company at the reference date?"