Question: As an Internal Auditor writing a memo to Victor with your recommendations. In your 1-page memo, you should:

1) frame and briefly review the situation

2) outline possible courses of action

3)recommend a course of action and explain why.

Victor was hired as controller to help sort out and organize the records of a $7 million dollar medical supply firm, MedFirst. The company recently received a $1,000,000 small business bank loan to acquire the assets of Thomas Supplies, a competitor that was going out of business. In Victor's opinion, the acquisition was a financial mess. Thomas inventory records were misplaced or inaccurate, and no one could figure out the accounts receivable, most of which were over 45 days past due. Although Thomas sales staff were retained after the acquisition, a sales decline in the industry and poor management of the new firm led to attrition of the best and brightest individuals.

Because of the sales decline, the bank was pressing to know more about the consolidated entity's current financial situation. Therese, the bank vice president in charge of the loan, and her staff of bank auditors were in daily contact with Victor. Each morning, Victor was nervous about that days' cash draw since MedFirst really played the float. Moreover, Russell, the MedFirst president, would often hold large vendor checks in his desk drawer without telling Victor.

Although financial resources were strained (Medfirst has trouble reimbursing petty cash), a sense of optimism buoyed the organization. As the company expanded in the nursing home industry, it was generating enormous profits from Medicare with markups at eight times cost. Because of these sales, MedFirst should start earning a small profit in the fourth quarter. Even at the end of the year, however, Russell did not want to mention these sales figures to the bank or accrue the revenue and accounts receivable until Medicare checks arrived. He was unsure when the government would be paying for the goods and, more importantly, he wanted to have something in his back pocket in case the bank wanted to foreclose. Furthermore, Russell was the major stockholder in the firm and worried he would lose the MedFirst if bankruptcy proceedings should start.

After a few months of recording sales on a cash basis, Victor started slipping hints to the bank that MedFirst's financial status was better than reported. Still, it was not his company, and he needed to keep his job. He knew that Russell would played games with other people, but also that Russell would not appreciate other people playing games with him. Also, Victor was new at MedFirst and knew he would have to earn Russell's trust.