Expense Account Fraud

OP 3-5 ...

• While auditing the financial statements of the petty corporation , the certified public accounting firm of Trueblue and Smith discovered that its client's legal expense account was abnormally high . Further investigation of the records indicated the following :

• Since the beginning of the year , several disbursements totaling $15,000 had been made to the law of Swindle , Fox , and Kreip .

• S,F&K were not petty corporation's attorneys .

• A review of the canceled checks showed that they had been written and approved by Mary Boghas , the cash disbursements clerk.

• Boghas & other duties included performing the end of month bank reconciliation.

• Subsequent investigation revealed that swindle , fox , and kreip are representing mary boghas in an unrelated embezzlement case in which she is the defendant the checks had been written in payment of her personal legal fees.

• Fraud : denotes a false representation of a material fact made by one party to another party with the intent to deceive and induce the other party to justifiably rely on the fact to his or her detriment.

Types of fraud :

1. Employees fraud
2. Management fraud

Employee fraud: designed to directly cover cash or other assets to the employees personal benefit.

Steps of employees fraud:

1. Stealing something of value –assets-.
2. Converting the asset to a usable form –cash-.
3. Concealing the crime to avoid detection.

Factors that contributes to fraud :

1. Situational pressures .
1. Opportunities.
2. Personal characteristics –ethics-.

Required:

A- What control procedures could petty corporation have employed to prevent this unauthorized use of cash ?? classify each control procedure in accordance with the SAS 78 framework (authorization , segregation of functions , supervision , and so on) ??

Answer…

1. 1- We have to have a CFO " chief financial officer " to approve check issuing . (Transaction Authorization)
2. The person who approves check issuing is not the same person that performs bank reconciliation . (Segregation of Duties)
3. 3- We must have somebody to review cash disbursements and validate them . (Independent Verification)

Required

B- Comment on the ethical issues in this case ?? .

Answer …

The ethical issues in this case was misuse of position .

This misuse of position was represented in Mary using company's cash to cover her personal disbursements where she paid $15,000 to her attorneys and carried them as the company's legal fees .