Fraud is one of the challenges that organizations face today (Sahin, Bulkan & Duman, 2013). While most cases of fraud are perpetrated by external cases, some are the result of employee misconduct. In an effort to shield themselves from fraud, most organizations implement internal controls. Internal controls refer to the mechanisms, policies and procedures that firms initiate with the aim of enhancing efficiency, effectiveness and financial accountability (Leitch, 2012). Thanks to these controls, an organization is able to secure the commitment of its employees that they will be judicious in their use of company resources. When internal controls are missing, an environment where fraud and theft thrive is created.
An examination of the case of Mrs. Smith and X Company reveals a number of accounting standards violations. These violations occurred as a result of the absence of internal controls. One of the controls that are missing regards proper expense accounting. It is common practice for companies to set up accounts that match particular activities (Leitch, 2012). For instance, a cash account can be set up where all cash transactions are recorded. These accounts enhance the accounting process and safeguards against fraud. It is mentioned that Mrs. Smith incurred travel costs yet the company had not set up a corporate travel account. The failure to create this account makes it difficult for Mrs. Smith to be reimbursed in accordance with accounting standards. The reimbursement amount will need to come from a different account and this would go against accounting principles. This problem can be addressed if the company creates accounts for all activities. This measure will bolster proper accounting and discourage fraudulent conduct.
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The second internal control that is missing concerns the failure by the CFO to inspect the reimbursement request that Mrs. Smith submitted. The CFO relied on his previous contact with Mrs. Smith when he trusted that the reimbursement was in order. This failure could cause X Company to be defrauded. Instead of working with personal relationships, accounting officials need to follow protocol and proper procedure (Vaassen, Meuwissen & Schelleman, 2009). All requests for monies and other company resources should be subjected to intense scrutiny. This internal control measure plugs all loopholes that could be exploited to defraud an organization. While it is not stated that Mrs. Smith inflated the cost of her trip in her reimbursement request, this is indeed possible. If it is the case, then the company has lost a huge amount. To address this failure, company X should demand that all its employees should follow accounting procedures when processing requests for funds.
The lack of internal controls goes beyond the failure of the company to set up relevant accounts and the decision by the CFO to trust Mrs. Smith instead of examining her reimbursement request. Alex’s decision to wire $6,250 to Mrs. Smith’s personal account without inspecting the finer details of her request is further evidence that X Company has failed to put internal controls in place. By failing to examine Mrs. Smith’s request, Alex exposed the company to the risk of fraud. Mrs. Smith could have easily asked for an amount that is higher than what she had actually incurred. Accounting standards stipulate that all requests for funds should be investigated closely (Vaassen, Meuwissen & Schelleman, 2009). This ensures that fraud does not occur. It is important for X Company to ensure that all requests for funds are examined in detail to ensure that fraud does not take place. The failure by the CFO to examine Mrs. Smith’s request can be remedied by ignoring personal relationships and instead focusing on the details of the request.
Individual officers working at X Company are largely responsible for creating the risk of fraud. However, the company has also failed and this has created an environment where fraud can easily be committed. It is mentioned that Alex was unable to examine Mrs. Smith’s request because he was busy. The company can be blamed for this. It must have assigned him too many tasks that made it impossible for him to scrutinize Mrs. Smith’s request. To ensure that fraud does not take place, companies need to empower their accounting officers (Bragg, 2009). One way of doing this is ensuring that they are the demands of their jobs are not so overwhelming that they are unable to focus on their core mandate. X Company should lighten Alex’s load. This will go a long way in preventing fraud and boosting efficiency and financial accountability.
In conclusion, the case of Mrs. Smith and X Company underscores the importance of internal controls. The company was not necessarily defrauded. However, there are certain failures that expose the company to fraud. The lack of relevant accounts and the failure of the accounting officers are among the loopholes that can be exploited. The company also failed to create conditions that allow its accounting officers to focus on their jobs. By addressing these failures, X Company will be insulating itself against fraud.
References
Bragg, S. M. (2009). Accounting Control Best Practices. Hoboken, NJ: John Wiley & Sons.
Leitch, M. (2012). Intelligent Internal Control and Risk Management: Designing High Performance Risk Control Systems . Farnham: Gower Publishing.
Sahin, Y., Bulkan, S. & Duman, E. (2013). A Cost-Sensitive Decision Tree Approach for Frau dDetection. Expert Systems with Applications, 40 (15), 5916-5923.
Vaassen, E., Meuwissen, R. & Schelleman, C. (2009). Accounting Information Systems and Internal Control. Hoboken, NJ: Wiley.
