THE ACCOUNTING FUNCTION

Like other organizations, Lexington Country Day has had a difficult time attracting a diverse candidate pool to fill its open faculty and staff positions.Working with the board and the Parents Association, the Human Resources Department tried a number of different approaches to increase diversity in its ranks especially at the faculty and staff level.These efforts were beginning to pay off since two of the three head coaches and two of 10 faculty members recently hired were all members of underrepresented minority groups.However, finding qualified candidates for staff positions, especially at the professional level, was more challenging.

Lexington Country Day was excited to receive Mary Sunshine's resume in April 1996 for its unfilled accounting clerk position.Mary's resume showed that she had an accounting degree with four years of bookkeeping experience.Mary's resume also showed that she had not worked in the last nine months.Lexington Country Day included her on the list of candidates to interview and made a note to follow up on the gap in her work experience.

The interviews with Mary went better than even Lexington Country Day expected.She was quiet and shy and had a smile that "lit up the room" and seemed to have a good grasp of the basic accounting knowledge required by Lexington Country Day.John Smith, the Human Resources Director and Jane Flowers, Controller, quickly identified her as their number one candidate.During the interview, Mr. Smith discussed the lapse in her employment history with Mary.Mary responded that she was diagnosed with breast cancer a year earlier.After consulting with her doctor and her husband, she decided to quit her job so she could undergo treatment."Thank goodness the treatment was successful," she said, "and now the cancer is in remission."With her improved health, she felt it was time to return to the work force.No additional follow-up was performed by Lexington Country Day and Mary was offered the job as accounting clerk.Mary joined the staff of Lexington Country Day on May 1, 1996, reporting directly to the controller.

Lexington Country Day operates with a lean staff and as such, staff persons performed multiple tasks.As the accounting clerk, in a two-person department, Mary was no exception.Her duties included receiving all funds regardless of source, including those relating to the association events, preparing and making the bank deposits, reconciling all bank accounts, receiving all approved disbursement vouchers from departments, preparing the cash disbursements, preparing monthly activity reports, and preparing and mailing donors' gift acknowledgements (i.e., gift receipts).It should be noted that cash receipts were not acknowledged until received by the accounting department.

Jane Flowers reviewed the monthly bank reconciliations and monthly reports prepared by Mary.Jane was also in charge of coordinating Lexington Country Day's fundraising efforts in addition to the accounting functions, but she did not have an accounting degree.Her background was in public relations and she took over the accounting department after the departure of the previous controller, which resulted in the merger of the accounting and public relations departments.

It was a very stressful job but Mary thoroughly enjoyed it and flourished in her role.She always received excellent annual evaluations along with outstanding raises from Jane Flowers.Mary was such a dedicated worker that she did not take much vacation time while at Lexington Country Day even though she was eligible for three weeks vacations each year.She occasionally took a Monday or Friday off so she could enjoy a long weekend with her family.As Jane was her only backup, Mary was afraid that the work would simply "pile up" in her absence plus she was paid at the end of the school year for any unused vacation time.

Over the years, the Parents' Association and other departments questioned the anticipated income versus the actual amounts shown on internal reports.These discrepancies were brought to Mary and Jane's attention.Mary was always able to support the internal report balances and Jane fully agreed with and supported her explanations.

A major benefit for Lexington Country Day's employees was partial or full scholarships for their children to attend the school based on income levels. This benefit was effective after six months of employment.Mary obtained a full scholarship for her daughter Frieda to attend Lexington Country Day and she was initially enrolled in the middle school. Frieda is now an honors student in the upper school. Mother and daughter enjoyed the Lexington Country Day experience and were appreciative of their time together commuting and their weekly lunch in the students' cafeteria.

On the home front, Mary's family life was simply wonderful.Her husband was promoted to Vice President of Internet Marketing at his firm and her son was excelling in football and basketball at his junior high school.The family recently sold their home in one suburb and moved to a more upscale suburb into an $800,000 home with an outdoor pool and a two-car garage.The two BMWs in the driveway were a physical testament to their success.In honor of Freda's recent sweet sixteen birthday party, a fabulous pool party was given in her honor. No expense was spared as evidence by the food, flowers and the live steel band at the party.Freda's classmates were still talking about the party a month after the event.They felt that this was the best sweet sixteen party so far for the girls in the class.Mary was quite pleased when Freda told her of the complements as she finally felt she was in the same league as the other wealthy Lexington Country Day parents.

Meanwhile, the workload continued to increase for Mary without any increase in manpower or salary adjustment and as a result, her stress level was also increasing.Mary was becoming more agitated and was becoming more difficult in her interaction with others.Jane noticed the change in Mary's demeanor and thought it was only temporary and would pass.Frank, her husband, also noticed the change and was becoming concerned especially as Mary was not as attentive at home. Frank finally spoke with Mary and learned of her unhappiness at work especially with the increased workload and no additional assistance.Since the Christmas holidays were close, they both decided that Mary should quit her job, relax at home for the holidays and look for a new job in the New Year.

So in December 2006, Mary gave Lexington Country Day the required two weeks notice that she was leaving the school.This was a big blow to Lexington Country Day since it was losing a seasoned, well-respected employee.Jane tried to persuade Mary to stay by offering her more money, but this was not successful.John Smith, the Human Resources director, wanted to know the reason for Mary's resignation and she informed him that she was stressed and was afraid that her mood was affecting her marriage, and she was not willing to sacrifice her marriage for work.Lexington Country Day gave Mary the standard bon voyage package - a special luncheon and a Tiffany pen.

TRANSITION

Kim Street was hired in January 2007 to replace Mary.Kim was an unlikely hire for the position since she was a CPA with five years of Big 4 accounting experience.In fact, she was asked multiple times in her interviews why she was interviewing for the accounting clerk position as she appeared overqualified.The answer was simple: Kim was a young mother with two children in Lexington Country Day's lower school and like many moms she simply wanted to spend more time with her children.Lexington Country Day was pleased to have someone with Kim's background on staff.

Because Mary was no longer on the job, all parties agreed that the best way for Kim to learn the job was to review the work done by Mary.With her background, Jane expected Kim to make a smooth transition.As Kim combed through Mary's records she started noticing small discrepancies between the cash recorded in the bank and the school's general ledger versus those reported by the various outlets such as the cafeteria and the Parent's Association banquet.Individually, the amounts were not large - $250, $500, $1,000 - but she brought it to Jane's attention expecting to receive a simple answer.

Jane became alarmed upon the news as she had not looked at detailed transactions in the past and simply relied on Mary's integrity.Clearly, she felt that Mr. Fellows, the headmaster, should be notified of the cash discrepancies.Mr. Fellows also notified the board of trustees' chairperson of the potential problem even though the extent of the damage was unknown.A meeting was held between Jane Flowers, Greg Fellows and the chairperson and they agreed that the best course of action was to hire a forensic accountant to work with Kim to review Mary's transactions for the last 10 years.

The investigation was conducted with speed and efficiency especially as Mary kept such immaculate records.It quickly revealed discrepancies of approximately $500,000 between the amounts expected versus the amounts recorded in the general ledger for the last 10 years.The missing funds were from multiple outlets - tuition, fundraising events, the bookstore, and the cafeteria.The findings were discussed with the headmaster and chair of the board of trustees and turned over to the District Attorney's office for further investigation.

Mary was arrested by the local police on May 20, 2007 at her new workplace after the district attorney's investigation confirmed Lexington Country Day's findings.She was charged with one count of grand larceny in the second degree, one count of forgery in the second degree, and one count of criminal possession of a forged instrument in the second degree. Bail was set at $250,000 and Mary had to relinquish her passport. No criminal charges were filed against Frank by the district attorney.

The news of Mary's arrest raged through the Lexington Country Day community and caught parents, administration, and staff by surprise.It quickly divided the community into different camps.Some felt a sense of betrayal, others felt that Mary was innocent and was clearly framed, and others were simply waiting for the criminal case to be resolved.Meanwhile, Lexington Country Day filed a civil complaint against Mary and Frank Sunshine in which they claimed that the misappropriated funds were used to acquire their home and cars. Lexington Country Day also obtained a lien on the Sunshine's assets including their bank accounts.

Questions:

1. Did Lexington Country Day have a good corporate governance process? Explain your opinion.

2. There were internal control weaknesses at Lexington Country Day. What should Lexington Country Day have done to mitigate the control weaknesses identified?

3. Assume you are engaged to perform an internal control assessment at Lincoln Country Day School. Use the COSO framework to identify strengths and weaknesses in the control system and propose recommendations to management [Use the Appendix below].

4. Communicate your findings and corrective actions to the board of trustees.