The Case On September 10, 2011, the last day of Mrs. Lees fabulous family vacation, the waiter at a large chain restaurant asked her: will you need a printed receipt for your dinner? Mrs. Lee wondered if she heard him right. Did she misunderstand due to the loud music or his accent?

Did he mean: will it be cash or credit? She dug into her purse and found enough money to pay for the dinner in cash and for the road trip back home the next morning. She decided to pay cash. Well, you will not get a printed receipt in that case, the waiter reiterated, the

machine is down, and as you see the place is overcrowded. Mrs. Lee and her family had waited for almost an hour to be seated, but did not mind because it was a celebration of her new job. Mrs. Lee had recently been assigned as the area accounting manager for the chain

restaurant company they were now dining in, and her area included this location. No problem, she said with a sigh of relief. But the waiter went on to say: however, if you pay by credit card, then you will get a receipt. It was then that she became suspicious of the waiter.

She was not just any other customer on vacation. Indeed being part of the management team, she could not simply ignore her suspicions she had to reconsider her method of payment. She had to weigh her ethical values against the possible consequences before closing her bill.

Restaurant Incident

As a Certified Management Accountant and Certified Public Accountant, Mrs. Lee upheld high

ethical standards. In the aftermath of the Enron and WorldCom crises, the Institute of management Accountants (IMA) and the Board of Accountancy each required her to pass two

Continuing Professional Education ethics credits yearly (Institute of Certified Management

Accountants, 2014) since 2003. The IMAs Statement of Professional Ethical Practice and

Certified Public Accountants (CPA) code of conduct also required her to sustain ethical

standards at the professional and personal practice levels. As the area accounting manager

of the restaurant chain, Mrs. Lee had extensive experience in establishing systems and

procedures for internal control and fraud prevention. She believes that a good system

includes responsibility and accountability centers, as well as well-defined authorization and

approval procedures to safeguard vulnerable assets.

In this case, Mrs. Lee suspected her waiter of committing fraud. Initially, she believed that the

printer was broken when the waiter told her she could not have a receipt. When the waiter

noted that she could have a printed receipt if she paid by credit card, Mrs. Lees suspicions

escalated. The waiters claims were inconsistent. Consequently, Mrs. Lee insisted on a printed

receipt for her cash transaction. At this request, the waiter asked her to remind him of the

ordered items, which he rewrote on an order slip. He looked around, saw that his supervisor

was busy elsewhere, and reentered the order on the computer terminal. Half an hour later,

the waiter returned with a printed receipt. Mrs. Lee could not help but wonder: what caused

the time delay? Did it take that long to fix the printer and come back with a receipt, or was the

time delay meant to cover up the discrepancy between the new order time and the billing

time? Why did the waiter take our order again? Wouldnt that double the entered transactions

on the system? How would the cash reconcile at the end of day with the total daily

transactions? Was the original order deleted, and if so, why was it deleted? Who authorizes

such changes?

In Mrs. Lees restaurant incident, the information flow involved these details:

Documents: Sales order, invoice.

Processes: The customer initiates the sales order. The waiter writes down the order on an

order slip and enters it into the POS. Each waiter has an individual identification (ID) that

is recognized by the system. The waiter swipes the ID to the POS to enter the order. The

POS includes a button for each menu item. Once entered on the POS, the kitchen and

the main cashier receive the order input. The kitchen terminal prints the order slip, which

is handed to the chef for processing. Once the order is ready, the waiter is notified to

serve it to the customer. The waiter later closes the table orders and issues an invoice.

The invoice is automatically registered on the cashiers terminal. Once collected, the cash

is deposited with the cashier.

Parties involved: customer, waiter, kitchen, manager, and cashier.

Mrs. Lee analysed the information flow problem with her waiter and determined that there

were several problems. Although the system seemed sophisticated with built-in ID approval

controls to authorize modifications/cancellations of orders the manager allowed his approval

code to be used by waiters without supervision. In Mrs. Lees case, upon closing the table

order and issuing an invoice, the waiter asked her whether the payment was to be made with

cash or credit. At that point the waiter either cancelled the processed order and pocketed the

cash or issued an invoice for credit card payment. The order was reentered, which meant that

the original was most likely cancelled. Mrs. Lee questioned how the order could be deleted

after being served. Was there any kind of collusion with the kitchen staff, manager, or cashier?

Internal Controls

Mrs. Lee knew that the restaurant management had designed and implemented internal

controls to safeguard assets and to ensure fraud prevention. The relevant control activities

related to the sales and collection cycle included:

Segregation of duties between sales order initiation and kitchen approval

Adequate approval of sales order modification/cancellation and authorization for collection

Pre-numbered sales order and sales invoice

Independent verification of the sequence of sales orders and sales invoices

Surveillance cameras

Employee rotation

Random managerial spot checks

Policies and procedures requiring the issuance of a customers printed receipt and

Ratio analysis:

Cash sales to credit card sales per waiter, per branch, per day....

Meal count per waiter relative to sales.

Mrs. Lee understood that management usually selects some but not all internal controls

based on the costbenefit rule. However, her major concern was the functionality of the

selected controls, including authorization and approvals, employee rotation, and random

checks.

Prior to requesting her receipt, Mrs. Lees waiter was too friendly. Despite the busy evening,

he spent more than the expected time to take a customer order. He inquired about her

vacation and shared some of his personal concerns. He did not enjoy working weekends and

over-time, but felt it provided a good source of income to cover his educational expenses. The

waiter also noted that despite his misgivings, he felt like the restaurant was his second home

because he had been working there for several years. Mrs. Lee noticed that everyone was

friendly and her waiter had close relations with all of the employees: the managers, the

waiters, and the kitchen staff. Mrs. Lee also noticed the manager repeatedly lending the

waiter his ID to expedite customers orders that required approval for POS input changes. By

assessing the waiters behavior, Mrs Lee realized that the flow of information was

compromised in several areas and that the internal controls were not properly maintained to

prevent fraud in this case. In addition, she also realized that the waiter had the pressure, the

rationalization, and the opportunity to commit fraud .

Mrs. Lees Assessment

After a thorough analysis of the consequences on all the stakeholders she could think of

the waiter, herself, her professional colleagues, the manager, and the owners Mrs. Lee

realized that the waiter would be the only one at a disadvantage if she reported the incident.

He might lose his job, his education, and his peers. Moving beyond her personal ethics to

include her professional ones, Mrs. Lee felt it was best to pay cash and report the waiter. She

had used her professional knowledge to assess the flow of information in the restaurant and

determined that since it was likely that her waiter was attempting to commit fraud, she was

ethically bound to report it.

Discussion Questions

1. Assess the ethical dilemma of the case:

• Identify the ethical dilemma faced by Mrs Lee and discuss any IMA principles

and standards that apply.

• Identify the parties involved.
• Identify the possible courses of action.
• Evaluate the advantages and disadvantages for each alternative course of

action.

• Select the best alternative.

2.Assess the internal controls over the sales and collection cycle based on the restaurant

incident:

• Identify the parties involved in processing a customers sales order.
• Identify the weaknesses in the sales and collection cycle observed by Mrs Lee in

the restaurant incident.

• Suggest possible internal control activities to strengthen the identified

weaknesses above.

3.Assess the fraud issues of the case:

• Discuss the potential presence of the fraud triangle elements.
• Identify and discuss the potential fraud type.
• Suggest audit procedures for the suspected fraud.