Jason Scott is an internal auditor for Northwest Industries, a forest products company. On March 31, 2021 he reviewed his completed tax return and noticed that the federal income tax withholding on his final paycheck was $5 more than the amount indicated on his W-2 form. Form W-2, also known as the Wage and Tax Statement, is the document an employer is required to send to each employee and the Internal Revenue Service (IRS) at the end of the year as on March 31. A W-2 reports employees' annual wages and the amount of taxes withheld from their paychecks. Jason used the W-2 amount to complete his tax return and made a note to ask the payroll department what happened to the other $5. The next day Jason was swamped, and he dismissed the $5 difference as immaterial.

On April 16, while he was at the cafeteria, he overheard a co-worker grumbling that the company had taken $5 more from his paycheck than what he was given credit for on his W-2. When Jason realised, he was not the only one with the $5 discrepancy, he started an investigation and found that all 1,500 employees had the same $5 discrepancy. He also discovered that the W-2 of Don Hawkins, the payroll programmer, had thousands of dollars more in withholdings reported to the IRS than had been withheld from his paycheck.

Don had been passed over the previous year for a managerial position. He even mentioned in the passing to Jason about favouritism and unfair treatment on the part of the company. During the latter part of the previous year, Don had been in charge of a payroll program update. Jason understood that due to heavy workload, the other systems personnel had not reviewed the update. He also knew that when he reported the situation, management was going to ask questions, such as:

1. What legally constitutes a fraud?

2. How can Jason prove it is a fraud in this case?

3. How was the fraud perpetrated? What motivated Don to commit it?

4. Why did the company not catch these mistakes? Was there a breakdown in controls?

5. How to prevent the fraud from happening again?

Imagine you are in the position of Jason, the internal auditor. Give your answers to the management in this case.