Integrated Cases Chapter 5
CHAPTER 5: Integrative Case- Northwest Industries N Date: December 3, 2011 Information Management Immediate Issues or Problems * Is there an existing fraud in the payroll system of Northwest Industries? * What courses of action should be done by Northwest Industries to prevent and detect fraud? Basic Issues or Associated Issues * All of the 1,500 company employees of Northwest Industries had a discrepancy between their reported withholding and the actual amount withheld. The W-2 of Don Hawkins, a programmer in charge of the payroll system, showed that thousands of dollars more in withholdings had been reported to the IRS than had been withheld from his paycheck * What are the factors that motivate to commit fraud? Issue Analysis or Information Summary Issue Analysis or Information Summary Issue Analysis or Information Summary Our society has become increasingly dependent on accounting information system, which have grown increasingly more complex to meet our escalating needs for information.
As system complexity and our dependence on system increase, companies face the growing risk of their systems being compromised. Managers should be alert to the possibility that unusual events or transactions could be symptoms of fraud or attempted fraud. Fraud may also be highlighted as a result of specific management checks or be brought to management’s attention by a third party. Fraud takes two forms: misappropriation of assets and fraudulent financial reporting, either the two fraud has a harmful effect in the overall organization. There are three present conditions when fraud occurs.
First is pressure that motivates a person to commit fraud. Second is Opportunity that allows a person due to situation to commit and conceal fraud. Third is rationalization that allows perpetrators to justify their illegal behavior. Prevention is the key to make fraud less likely to occur. During the latter part of the year, the payroll system had undergone some minor modifications.
Don had been in charge of the project. Due to pressing problems with several other projects, the payroll project had been completed without the usual review by other systems personnel.Jason arranged for a member of the audit staff, who was a former programmer, to review the code changes. She found a few lines unusual code in the program for generating the withholdings report for IRS. This code subtracted $5 from employees’ withholdings and added it to Don’s withholdings. Don got his hands on the money when IRS sent him a huge refund check.
It appeared that Don intended to use the scheme every year, as he not removed the incriminating code. He must been fairly confident of his scheme, because he had not tried to modify the company’s copy of the withholdings report.Somehow he knew there was no reconciliation of withholdings from the payroll records with the IRS report. It was a simple plan, and it could have gone undetected for years if Jason had not overheard someone in the cafeteria talk about a $5 difference. Alternative Solutions or Options: * Engage Forensic Auditor Benefits that can be obtained by utilizing forensic auditors include revealing any potential areas of questionable concern regarding financial information or operations. Forensic auditors provide benefits in the form of exposing underlying fraud in the financial information.
They make certain the financial information is a realistic representation by assessing the account presentation and accounting systems. They can offer suggestions for improving the information. In turn, this can save individuals and companies_money_and_potential_liability. * Improve their internal control Internal Control is a process implemented by board of director and management to provide reasonable assurance in safeguarding assets, providing accurate and reasonable information, promoting operational efficiency and complying with applicable laws.When an organization has a good internal control, it is most likely to happen that fraudulent act may lessen. * Train employees in fraud awareness, security measures and ethical issues Fraud awareness training is one of the main tenets of a fraud strategy.
Educating staff in respect of what to look for and how fraud happens empowers them to take the necessary action to mitigate the risk of it occurring or, when it does occur, address it in the correct way. All staff benefit from fraud awareness training.The more staff that are educated, the more eyes and ears you have to protect the organization’s assets. Organizations should regularly communicate to staff a clear definition of the types of behavior that constitute fraud or corruption, the fraud detection measures that are in place and an unequivocal statement that fraud and corruption within the organization will not be tolerated. The primary purpose of fraud training is to assist in the prevention and control of fraud by raising the general level of awareness amongst all employees.Recommendations and Implementation: I am recommending to improve the internal control and train employees in fraud awareness.
Improving internal control can be done by developing a strong system of internal controls that implement a proper segregation of duties between systems function. They should also require transactions and activities to be authorized by appropriate supervisory and have the system authenticate the person, and their right to perform the transaction before allowing transaction to take place.They should have also required independent checks on performance, such as reconciliation of two independent set of records, where possible and appropriate. Since they use an Accounting information system, they should also implement computer-based controls over data input, computer processing, data storage, data transmission, and information output. And they should immediately fix known software vulnerable by installing the latest updates to operating systems, as well as security and application programs.
Training employees may be done by requiring seminar to employees about their awareness in fraud. S;S can also implement human resource policies for hiring, compensating, evaluating, promoting, and discharging employees that send messages about required level of ethical behavior and integrity. Effectively supervising employees can be done and requiring annual employee vacations, periodically rotate the duties of key employees, and required signed confidentiality agreements. Monitor and Control: Improving Internal Control| Employee training| Periodic evaluation and testing of controls by internal audit| * Reviewing work, either total output or samples. | * Continuous monitoring programs built into information systems, | * Observing employee work activities.
| * Analysis of, and appropriate follow-up on, operating reports or metrics that might identify anomalies indicative of a control failure| * Reading reports, charts, time sheets, work records, or logs, etc. | * Supervisory reviews of controls, such as reconciliation reviews as a normal part of processing| * Self-reporting on progress by the employee. * Self-assessments by boards and management regarding the tone they set in the organization and the effectiveness of their oversight functions| * Surveying other units, the public, or clients of the services. | * Audit committee inquiries of internal and external auditors| * Noting and investigating complaints and commendations. | * Quality assurance reviews of the internal audit department| * Consider and analyze the personality and attitude of employees| Issue Analysis or Information Summary