Greg Stevens has just been hired as the Finance Director of the town of Smallville, Georgia. For the past five years, Greg has worked in a nearby town as the Assistant Director.
As the ‘new kid’ in town, Greg was interviewed by a reporter from the Smallville Daily Observer for a feature article in the business section. Greg talked about his family and the many civic activities that he supported both financially and by volunteering his time. He also discussed his vision for the future of the Finance Department and identified a number of short-term and long-term goals. Initially, Greg wants to implement a number of changes designed to improve the efficiency and effectiveness of departmental operations. He plans to eliminate a number of accounts that are rarely used. He also hopes that financial information can be provided more quickly when requested by citizens or other city agencies. He notes that prompt responses should increase public confidence in the Finance Department. Greg is especially concerned about the extent of employee turnover. Five of the seven department employees have held their current positions less than one year, and training costs can be rather significant. Greg has been told that the previous Director, Michael Grayson, was very controlling and task-oriented, and that this may have caused employees to seek employment elsewhere.
Greg notes that the city does not have an internal audit staff. However, the local accounting firm of Sanders and White, LLP has audited the city’s Comprehensive Annual Financial Report for each of the past 13 years. The city has been growing steadily for the past several decades and currently has a population just over 73,000. Last year, Smallville collected over $89 million in gross operating revenues.
Greg has recently implemented several changes within the Finance Department, changes he believes will improve operations and boost morale. First, he informed all employees that he expects them to take full advantage of all of their earned vacation days. Since employees must work in the department for at least one year before they can apply for vacation, Libby and Bob are currently the only employees who are eligible to take any paid vacation days. Libby is the Chief Accountant and reports directly to Greg. She manages and maintains the General Ledger and the approved vendor list. Libby is also responsible for general office management and day-to-day operations in the department. She earned a degree in accounting from the local university and has worked for the department for 15 years. Libby is 37; her husband owns a local hardware store. Bob is the Accounts Payable Clerk and reports directly to Libby. He processes all city payments to payees for last names beginning with A through L. Bob is 36 and has worked in the department for almost two years. He is single and has lived in town his entire life except for the five years he served in the U.S. Navy. Bob is planning a one-week fishing trip to Lost Pines Lake this summer, but Libby insists that she cannot take any vacation because “there are so many new employees.” Libby does appear to be busy. She is usually the first to arrive at work each day and the last to leave at night. However, Libby will lose quite a few days of leave time if she does not take a vacation soon. Greg has insisted that she take a break. Libby agrees to do this, but only takes one day at a time.
Greg has also created new controls within the accounts payable function. First, the two accounts payable clerks (Nora and Bob) check each other’s documents for accuracy at the close of each workday. Nora is the other Accounts Payable Clerk and reports directly to Libby. She processes all city payments to payees for last names beginning with M through Z. Nora is 20 and has been employed by the department for six months. She is single and lives in an apartment complex near the university campus.
Each Tuesday, Libby collects the invoices to be paid for that week and prepares the documentation so that checks can be drawn and mechanically signed in the nightly cycle. The following morning, Libby collects the printed checks, verifies the amount of each check with the register, confirms that all supporting documentation is attached, sends the checks to the mailroom for delivery to the vendors, forwards the daily check register to Scott for use in the bank reconciliation, and returns the invoices to Nora and Bob for inclusion in the vendor files. Libby is also responsible for periodically reconciling the Accounts Payable subsidiary ledger to the control account. Greg arrives at work on Wednesday and is surprised to find the office locked.
As he opens the door, he hears the phone ringing. It is Libby’s husband, who informs Greg that Libby had an automobile accident on the way to work and is being admitted to Smallville Hospital for observation. Greg plans to take over Libby’s duties until she recovers. He begins by collecting the checks that were printed the previous night, along with their supporting documentation. After verifying the amount of each check with the register, he hands over the paid invoices to Bob and Nora for filing. Nora is surprised to find an invoice made payable to Zenith Enterprises. She does not recall processing this invoice the previous day. Nora tells Greg that there must be some mistake. Greg verifies that Zenith Enterprises is on the approved vendor list as providing time management consulting services but he doesn’t recall the company or why the town of Smallville would need this service. He also notices the vendor address looks familiar.
This case does not require a formal report. The format of your answers should be as follows: repeat the question, provide your answer.
1. Discuss the risk factors in the case.
2. Based on the risk factors identified in question 1, what type of fraud(s) could be occurring (Be very specific). Explain your answer with examples from the case.
3. Based on the fraud(s) identified in question 2, what procedures would you perform to detect the fraud(s)? Your procedures need to be very detailed and include any documents you would need.
4. Based on the fraud(s) you identified in question 2, what procedures would prevent this fraud(s)? Your procedures need to be very detailed, including any documents you would want (you cannot suggest hiring another employee).
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