In paragraph form, list five concerns/recommendations that you would make to address the issues raised in this set of circumstances.

U pon entering the accounting offices of Carlton Chemical, Inc., one is met with drab fluorescent lighting, a few small cubicles, and dim morale. What one would not find, however, is the presence of Mr. Seneca Staunton, former accounts receivable (AR) clerk. Seneca left the company after being accused of posting AR payments to customers' balances due instead of applying amounts paid to specific invoices. He may have come from modest beginnings, but Seneca achieved relative success and the possibility of a career when he accepted a position as an accounts receivable clerk at Carlton Chemical. Although he had completed no formal college accounting courses, he had excelled at bookkeeping duties at a small local company prior to applying to Carlton. Proud of his accomplishments and looking forward to his new opportunity, Seneca embarked on his accounts receivable duties with commitment and enthusiasm. He was happily married for the second time, a ''Brady Bunch'' union that combined two families for a total of seven children. On evenings and weekends, the family worked at a small farm in a rural part of the county. At Carlton Chemical, Seneca's responsibilities included accounts receivable collections, posting payments, resolution of customer service inquiries, maintenance of the accounts receivable subledger, and reporting to management about the status of collections. Alfred Rollins, the former AR clerk, had recently been promoted to assistant controller. It was his job to train Seneca in his duties and be available as a supervisor. This gave Seneca confidence and, knowing that the last person in his position earned a substantial promotion, was especially positive for him. The sky was the limit. Patrick Dawley, one of the initial owners of Carlton Chemical, had started the company over 30 years ago. Originally the idea was to provide chemicals to local manufacturers and a few smallscale customers to be used as raw materials. The company followed a path of slight, steady growth, but after 17 years of business, interest in the endeavor had waned in most of the owners except Patrick. He continued to see opportunity, and as the only handson owner, he determined that it was time to take sole possession of the business. Generally, the margins in the chemical business are small. However, what drives profits in this industry are margins by specific product type and efficient operations, such as accurate order taking, billing, and collections, and perceived customer service, including availability and reliability of chemical deliveries. Patrick loved his company and was viewed as the problem solver. He seldom engaged the staff related to clerical issues, inventory procurement, customer delivery, or similar daytoday activities. But when challenges arose, Patrick was at the center, trying to solve the controversy. He also oversaw policy decisions (including pricing, credit, commitment to customer satisfaction, etc.) and was involved whenever necessary. Under Patrick's leadership, the company grew to approximately $125 million in revenues with record setting sales, just two years prior to the discovery of the fraud. Net income was relatively modest, ranging from $450,000 to $950,000 under optimal conditions. Fudging and Whining As in many businesses, Carlton Chemical's annual financial statement audit puts a strain on the entire organization. And this strain seemed to fall disproportionately on Seneca. Not uncommonly, the auditors observed some consistent behavioral patterns with Seneca. He often whined about assisting the auditors and complained that he didn't have time to prepare their schedules and pull their backup data. When the schedules and data finally were delivered to the audit senior, she became concerned about unusual reconciliation items between the AR detailed list of balances due and the general ledger, reconciling items without support. The audit senior shared her concerns with Carlton Chemical's controller, Max Fairchild, who spent a long, late evening examining AR records. The accounts receivable posting process had not been followed recently, and Seneca had fudged the AR reconciliation. Max concluded his evening by preparing a formal reprimand to present to Seneca for ''not following policy and procedure,'' including improper posting of deposits and failure to clear invoices per the customer remittance. Due to nervousness and the crisis du jour, Max did not confront Seneca until late afternoon the following day. Seneca admitted to the policy violation, seemed to deeply regret his shortcuts, and begged for a second chance. Then in concert with Max, the two developed a formal ''plan of resolution,'' as is required on all personnel reprimand forms, which included: Immediate reconciliation of accounts receivable balances by customer Additional temporary help for Seneca Agreement that all future payments must be applied properly to invoices per customer remittance statements Agreement that an Accounting Department supervisor would audit the application of customer payments on a monthly basis The following morning, Seneca's time card read that he clocked in at 7:02 a.m. and clocked out at 7:40 a.m. During that time, he had been observed cleaning out his desk and removing personal items. Later in the day, shocked at his absence, Max and Alfred launched a more detailed review of AR and started making collection inquiries. Initial calls to customer Accounts Payable Departments revealed that many invoices listed as 30 days or older had already been paid. Where, then, had the money gone, and why were paid invoices still listed in the accounts receivable subledger? Heading the Wrong Way The day the perpetrator disappeared was not a good day for Max. As he entered the company parking lot, he waved to Seneca, who was heading in the other direction. That was Max's first clue. Upon arrival in the accounting area, he asked the staff about Seneca, who had apparently spoken to no one. Evidence suggested, though, that he would not be back. Max was incredibly loyal and smart. Overworked but dedicated, he knew his first responsibility was to speak to Patrick. While the conversation would be difficult, the boss was known to be evenkeeled and benevolent. Only later would it be revealed that Max had discovered just the tip of the iceberg in his initial investigation. Collection of accounts receivable is the lifeblood that supports Carlton Chemical, so Patrick immediately launched an investigation using a threepronged approach: 1. He brought in Alexa Hoffwire, a management information systems specialist, initially to lead and coordinate all aspects of an internal investigation. Patrick needed to ensure that Max was not involved. To do this, he needed eyes outside of accounting. Alexa examined the AR balances and supporting documentation, electronically mining the subledger data to determine what had happened. 2. Patrick asked Max to develop an investigation plan related to the underlying paperwork. He also hired a local outside certified public accounting firm to examine the investigation plan to ensure that the process championed by both Alexa and Max would result in detailed AR balances that were collectible and supported by underlying documentation. 3. Patrick hired a private investigator, a former Internal Revenue Service criminal investigations agent, to contact, interview, and investigate Seneca. It was no surprise when Alexa confirmed that Max did not appear to be involved. Alexa's initial investigation of a sample of customer accounts receivable balances suggested that most of the 500 AR amounts likely had problems. Patrick and Max were flabbergasted. Invoices are posted to the AR system through sales orders and proof of delivery information, data generated and keyed outside of accounting; thus, Seneca had no access to posting into the AR subledger. Further, Seneca had almost no access to cash; 95% of customer payments were made to the company's lockbox, and the remaining 5% were brought to the company by delivery personnel who picked up customer checks. These checks were processed, copied, and sent to the bank by Patrick's administrative assistant. Seneca did not interact with the administrative assistant or the drivers, nor did he have access to or complete monthly bank reconciliations that were prepared on a timely basis. Due to the nature of the chemical raw materials industry, Carlton must balance inventories on a daily basis in order to satisfy Environmental Protection Agency requirements. Related to this process, the company monitors chemical shrinkage. No large discrepancies were ever observed. The results from daily reporting were confirmed during the annual financial statement audit where inventory was counted. No big inventory overages or underages were discovered during this process either. Max's credit authority limit was $25,000, while his combined limit with the vice president (VP) of sales was up to $75,000. Beyond that amount, Patrick personally approved all credit. Accounts receivable balances, in total, fluctuated in the past few years but had not risen as disproportionately to sales as one might expect, given the circumstances. Most important, every Monday morning, the company held a customer service meeting that included a review of all outstanding AR balances for each customer. When in the office, Patrick attended these meetings along with the VP of sales, Max, and Seneca. The company was religious about customer service and collections. This still left everyone scratching their heads. Where had the money gone? And why were paid invoices still listed in the AR subledger? More fundamentally, in an internal control environment centered on quality customer service and AR collections, how could this have happened? The Good, the Bad, the Ugly The results of the private investigator's (PI) work provided news, both good and bad. The PI aggressively interviewed Seneca at his modest home in the presence of his wife and completed a public records search. The PI indicated that Seneca did not appear to have stolen any money. He observed no lifestyle changes; Seneca did not appear to have any wads of cash; there was no evidence that the Stauntons were living beyond their means. Seneca stated that he was simply overwhelmed from the beginning and that he had made a lot of mistakes. He had planned to clean up the mess, but the problems just snowballed out of control. Even with this information, Alexa and Max determined that they would remain vigilant for missing cash. The PI's findings were consistent with the interviews of personnel that I conducted as part of my work as a fraud examiner. No employees observed Seneca as having an extravagant lifestyle, living beyond his means, nor did anyone indicate that Seneca had any pressing financial difficulties. Once the scope of the investigation broadened to the majority of Carlton Chemical's customers, Patrick hired additional temporary accountants from outside the company. The investigation process involved calling each customer and requesting that the customer send in a listing of all accounts payable activity related to Carlton Chemical for the last four years, starting the period just before Seneca was hired as the AR clerk. Optimally, customers were requested to provide these data in electronic text files. Armed with this data, Alexa wrote a series of dataprocessing programs to match data from the electronic customer files to Carlton's AR files. Open items were numerous and of a wide variety. Most disturbingly, the analysis revealed large numbers of alleged customer payments that did not appear in the customer AR detail for that customer. Fortunately, the payments were traced to bank statements to ensure the money was deposited in company accounts. But what Alexa found was that the money had been posted to the AR details of other customers, a sort of shell game. Another common open item included unpaid invoices and unpaid partial invoices older than 15 days. These open items were manually investigated by Max and the temporary accountants. Once the clean balance of AR was obtained, all remaining invoices were written off. These writeoffs were manually tracked by customer in an Excel spreadsheet. Some of the anomalies included: There was no apparent followup with customers regarding unpaid invoices. Some customers place the burden on Carlton Chemical to provide accurate invoices and supporting documentation before making payment. In order to process a payment, most customers require a valid purchase order, proof of delivery, and an accurate invoice. The absence of any of these three documents can delay payment. Seneca was supposed to contact customers about unpaid invoices and, where necessary, fax them the appropriate documentation. This process was not followed. Deposits from one customer were posted to another. In an effort to hide the fact that older invoices were unpaid, Seneca took new payments and posted them to old invoices, regardless of the source of the check. This created massive problems for reconciling AR balances and required extensive cooperation from Carlton Chemical's clientele. In that regard, some customers failed to acknowledge requests for information. However, no missing cash was discovered for those who provided documentation for payments we had not initially credited. There were payments to ''balances'' instead of invoices and payments applied to the oldest open invoices instead of those listed on the check remittance. To hide this activity, approximately two and a half years before he quit the company, Seneca stopped mailing monthly statements to customers. This anomaly was not noticed by Accounting Department leadership but was noted by customers during the reconciliation process. In a few instances, credit memos were posted to write off unpaid invoices. Max and Patrick must approve all AR writeoffs. In a few cases, Seneca posted writeoffs to AR invoices, but not enough to draw attention to him or for large dollar amounts. There was no apparent followup when customers claimed inappropriate discounts. Due to already thin margins, Carlton Chemical generally did not offer discounts for timely payment, such as ''2/10 net 30.'' However, in some cases deals were negotiated with special clients. Some of those customers took discounts no matter when payment was made and put the onus on Carlton Chemical to follow up for collection. Evidence from the AR system indicated that Seneca simply reduced the invoice amount for the discounts taken that were outside the system time limits. As part of my investigation, I formally reviewed approximately 45 customer payment remittance statements where the average customer payment might contain as many as 40 or more invoices. My investigation revealed that virtually every remittance had some payments applied to the wrong invoices when compared to the AR detail. They also contained inappropriate discounts. In at least two cases, the entire payment was not posted to the customer under examination. The results of the investigation suggest that Seneca did not follow up with customers regarding missing or unpaid invoices. Carlton Chemical clients require an invoice, reconciliation to their own purchase order, and a signed delivery ticket before they are willing to make payment. Customers often place the burden of proof on Carlton Chemical to have accurate bills and provide the necessary supporting documentation. Further, clients are notorious for taking unearned discounts. Providing them with supporting documentation and following up on inappropriate discounts is time consuming. Seneca had neglected both of these activities to the detriment of the company. When faced with proof of unpaid invoices, some customers paid amounts owed. Several became upset about these debts, which sometimes went back several years, but Carlton Chemical only lost a handful of small customers during the multimonth cleanup process. Most disconcerting is the fact that Seneca was taking deposits from one customer and posting those payments to other customers. Generally, he used payments from large customers to mask unpaid invoices from smaller customers. This issue created problems of massive proportion during the reconciliation process. Based on the investigation, Patrick, Max, and I concluded that no cash was missing. The most compelling pieces of evidence included: Seneca had no access to the general ledger system, bank statements, or bank reconciliations. Generally, Seneca had no access to cash. Company representatives concluded that collusion would have been necessary for him actually to steal cash, and no collusive relationships were observed. Because supervision appears to have been minimal, it may have been possible for Seneca to credit memo away AR balances, but the evidence did not support this contention. During the investigation, no customers indicated that payments had been made but the payment had not been posted in a bank account. Seneca had begun to cook the books within months of taking on the accounts receivable duties. Like most frauds, once on the slippery slope, it snowballed. While these findings were interesting, questions remained. How much money was lost and how had Seneca pulled it off? Who's Been Minding the Store? There is no doubt that lack of supervision provided an environment that allowed Seneca to operate unimpeded. Nevertheless, every Monday morning, the accounts receivable subledger was reviewed in detail by the VP of sales, Max, and, most weeks, Patrick himself. In this control environment, how did AR balances not balloon and the AR aging not reveal unpaid old invoices? The answer to that question is relatively simple. Seneca was a quiet and shy person. He was much more comfortable working with the company's books and records than spending time on the phone contacting customers. Thus, instead of tracking down unpaid invoices, he spent time using the accounts receivable system's debit and credit memos. Every Friday afternoon, in preparation for Monday's customer service meeting, Seneca would write off all of the old unpaid invoices. It was this cleanedup version of the AR subledger that he presented to and reviewed with Carlton Chemical leadership. Then, on Monday afternoon, Seneca spent his time reversing all of the credit memos with debit memos. A review of credit/debit memos report provided by Carlton Chemical revealed: Year 1 Year 2 Year 3 Year 4* Total number of debit/credit 285 600 1,000 150 memos Debit memos dollars related to $4,000 $50,000 $65,000 $4,000 specific invoices Credit memo writeoff dollars $9,000 $90,000 $75,000 $35,000 related to specific invoices Number of offsetting credit and 100 250 330 20 debit memos (to same company for the same amount) This evidence was compelling. The fact that Seneca put dollars back in the accounts receivable system after the customer service meeting rather than posting credit memos and leaving them off the system, coupled with no proof of missing money, strongly suggested that he was not stealing money. The evidence indicated that the problem was isolated to manipulation of data, which resulted in the destruction of the integrity of the electronic records in the accounts receivable subledger. The investigation revealed no confirmation of physical destruction of supporting documentation. Some missing documents were observed, but no pattern emerged, and the number of those missing appeared to be no more frequent than in a normal filing system. The initial individual customer reconciliation process took almost months and revealed a staggering $2 million in unexpected, unpaid, older accounts receivable balances. Max devoted his life to resolving this problem for Patrick. It consumed his every waking hour, including evenings and weekends. It haunted his dreams at night. One of the hallmarks of Carlton Chemical is its devotion to quality customer service. This commitment paid handsome dividends during this difficult time. First, most customers cooperated and provided the company with the electronic and hardcopy records required to reconstruct the accounts receivable books and records. This data filled a ''war room'' where the primary investigation was completed. Second, when faced with unpaid but legitimate invoices, many customers made payment for past due amounts. However, after another two months of dedicated work, Max still had $1.4 million of unreconcilable and uncollected balances. Without being able to demonstrate proof of delivery, a bona fide invoice and purchase order, and, most important, proof of non payment, it was impossible for Carlton Chemical to approach its customers. Essentially, the AR writeoff Excel summary sheet included upward adjustments for some customers and downward adjustments for others with the net being $1.4 million in downward adjustments: Large customer writeoffs $2,000,000 Small customers balance increases (600,000) Net accounts receivable writeoffs $1,400,000 The company reviewed 100% of discounts taken and estimated that $700,000 of the large customer writeoffs were due to inappropriately taken discounts. But a long period of time had passed and the company was worried about losing customers, so it chose not to pursue collection of unpaid discounts. After six months of roundtheclock work, the company had achieved its goal of having detailed accounts receivable balances that were collectible and supported by underlying documentation. However, the remaining unsubstantiated and uncollectible amounts totaled $1.4 million in losses. In an interview with Seneca, I presented him with this amount. He was adamant that this number was far too large to have been caused by his mischief. His motivation: ''I was just trying to keep my job.'' Seneca Staunton started as a $28,000peryear accounts receivable clerk and received annual merit increases of approximately 5%. In his final full year with Carlton Chemical, he made a little more than $31,000. His effort to keep his job had cost his company $1.4 million in uncollectible AR losses. The reconstruction process cost another $125,000. Half a Loaf Despite this gloom, all was not lost. Carlton Chemical had an allrisk property insurance policy that included a rider for accounts receivable. Thus, Carlton Chemical approached its insurance provider with a claim for property losses. There were several challenges here. First, the policy required that the insurance company be notified immediately upon discovery of losses. Carlton Chemical launched its investigation knowing about the insurance coverage but without reading the details of the policy. Second, although the insurance policy was allrisk, the rider included several situations where losses to AR were not covered; these included errors arising from bookkeeping, accounting, billing, or data entry. While Seneca's actions were not erroneous, they were deliberate; this still provided a ''sticky wicket'' for Carlton. Further, the insurance rider did not cover losses arising from discrepancies between legitimate invoice amounts due and receivable balances. Because the Excel spreadsheet essentially reflected unsupported discrepancies, coverage was at risk. Again, how the discrepancies arose provided a legitimate explanation for the losses, but the writeoff amount could not be backed up with hard data. Finally, the insurance rider did not cover AR balances written off during the normal course of business, amounts traditionally characterized as bad debt. Since Carlton could not identify the source of the specific writeoffs by company, it was difficult to prove that the amounts had not arisen in the normal course of business. In fact, the evidence suggested that some of Seneca's write offs arose from customers that had historically been difficult collection problems. All of these items muddied the waters for Patrick and Max. Ultimately, Carlton Chemical and the insurance company negotiated a settlement that reimbursed Carlton for the reconstruction costs of $125,000 and covered approximately $400,000 of the accounts receivable losses, leaving the company with a $1 million loss, which was greater than a year's profit in even the best of times