Fast Bucks’ bookkeeper, Miss Smooth, fraudulently obtained funds through duplicate

payments to a supplier. Collusion was entered into with Mr Ordinary, bookkeeper of the
supplier, to obtain two originals of certain invoices and Miss Smooth then re-used delivery
dockets with the duplicate original invoices to support duplicate payments. The bookkeeper
of the supplier then converted into cash the cheques through his petty cash fund and
divided the proceeds with his friend Miss Smooth. A total of $15,000 was misappropriated
over two years in individual amounts of $50 to $250.

The small manufacturing company makes purchases from about 50 different suppliers at
short intervals throughout the month and for a considerable variety of small items of
merchandise. The average monthly purchases aggregate approximately $40,000.

The manager (owner) of the company took great pride in paying his accounts promptly and
made it a rule for the bookkeeper, Miss Smooth, to check the accounts and prepare them
for payment weekly instead of waiting until the end of the month. He had found from
experience that he was able to take advantage of certain discounts which he could not
secure if he followed the ordinary practice of paying his accounts monthly.

All goods were received by the receiving clerk who prepared and signed receiving slips that
were turned in at the end of the day to the bookkeeper in the front office. The bookkeeper
checked the receiving slips with the related invoices, attached them thereto and drew
cheques to the suppliers for the discounted amounts of the invoices. Each week the
cheques, accompanied by the invoices with receiving slips attached, were presented to the
manager for signature. The manager, who was always quite busy, would look at the
invoices, compare the amounts with the cheques, sign the cheques and hand them to the
bookkeeper who mailed the cheques and filed the invoices.

The bookkeeper arranged with Mr Ordinary, the bookkeeper for one of the suppliers, from
whom purchases averaged about $3,000 a month, for two copies to be made of certain
invoices rendered to the company. The merchandise would be received in the factory, a
receiving slip prepared and payment made in the usual manner. A week later the
bookkeeper would take the second original of the invoice
and attach it to the receiving slip that had already been used as support for the first
payment. A cheque would then be made out for this second invoice and presented to the
manager for signature together with about 50 other cheques with invoices attached.

The bookkeeper for the supplier customarily opened the mail. When the second cheque
came through he would substitute it in his petty-cash box for a corresponding amount of
cash. The cheques did not go through the banks until he replenished his petty-cash fund at
the end of the month. The cash was divided between the two bookkeepers on one of their
regular nights out on the town, thanks to the generosity of Fast Bucks Pty Limited.
In your answer outline:

a) The internal control weaknesses in both companies that allowed the fraud to be
perpetuated.

When your company doesn't have adequate controls in financial management, you don't know the true
financial situation of the company and you may report incorrect amounts to authorities for tax or it could
be fraud made by internal employee. Weaknesses in financial management controls have clear causes and
remedies. You only have to identify the problem areas, determine why your controls are not effective and
apply the corresponding corrective action.
Documentation

A major weakness in financial management is a lack of adequate documentation. Whether records are in
paper or digital form, financial management has to be able to reconstruct who initiated an action, such as a
payment; who approved it; who modified it, if it was modified; who executed it; and what resulted from
the action. Adequate documentation of activities establishes who was responsible for an action if a
problem arises later.

Function Segregation

Critical activities, such as issuing checks, have to be segregated into multiple tasks carried out by different
employees. Having the same employee handle the whole process constitutes a weakness in internal
financial controls. Typically one person issues the check, while two or more others sign it and another
employee sends it out and enters it into the books. Separating functions makes fraudulent activity more
difficult.

Deficiency Reporting

Deficiencies can occur in the design or execution of procedures, but financial management has to target
both possibilities with monitoring that detects discrepancies and issues corresponding reports. For
example, if software is not tracking important documents or an employee forgets to issue required forms,
employees in charge of verifying documentation have to issue a noncompliance report.

b) What improvements do you suggest should be implemented to prevent a recurrence

of such fraudulent activity?

Fraud Prevention 
It is vital to an organization, large or small, to have a fraud prevention plan in place. The
fraud cases studied in the ACFE 2014 Report revealed that the fraudulent activities studied
lasted an average of 18 months before being detected. Imagine the type of loss your
company could suffer with an employee committing fraud for a year and a half. Luckily, there
are ways you can minimize fraud occurrences by implementing different procedures and
controls.

1. Know Your Employees

Fraud perpetrators often display behavioral traits that can indicate the intention to commit
fraud. Observing and listening to employees can help you identify potential fraud risk. It is
important for management to be involved with their employees and take time to get to know
them. Often, an attitude change can clue you in to a risk. This can also reveal internal issues
that need to be addressed. For example, if an employee feels a lack of appreciation from the
business owner or anger at their boss, this could lead him or her to commit fraud as a way of
revenge
2. Make Employees Aware/Set Up Reporting System
Awareness affects all employees. Everyone within the organization should be aware of the
fraud risk policy including types of fraud and the consequences associated with them. Those
who are planning to commit fraud will know that management is watching and will hopefully
be deterred by this.
3. Implement Internal Controls
Internal controls are the plans and/or programs implemented to safeguard your company’s
assets, ensure the integrity of its accounting records, and deter and detect fraud and theft.
Segregation of duties is an important component of internal control that can reduce the risk
of fraud from occurring.

4. Monitor Vacation Balances

You might be impressed by the employees who haven’t missed a day of work in years. While
these may sound like loyal employees, it could be a sign that these employees have
something to hide and are worried that someone will detect their fraud if they were out of the
office for a period of time.

Question 2

Go to the Independent Commission Against Corruption (ICAC) website at

www.icac.nsw.gov.au. From the home page click on the link to Investigations then click on
the link to Past investigations. This will take you to a list of past ICAC investigations which
have been publicly reported with links to more information on each.
Select the investigation into Ryde City Council – allegations concerning the City of Ryde
Mayor, Councillor Ivan Petch (Operation Cavill) and provide a summary of the findings by
outlining details of the following:

a) The title of the investigation

Investigation into the conduct of certain City of Ryde Councillors and others - Operation Cavill

b) A brief summary of what they did wrong

The ICAC found that Ivan Petch engaged in corrupt conduct by:
  arranging, through John Goubran, to convey a threat to then general manager, John
Neish
 releasing confidential information concerning the discovery of adult material on Mr
Neish's computer to various people in an attempt to encourage its reporting in the media
so as to undermine Mr Neish's credibility and reputation and to cast doubt on his
suitability to serve as the Council's general manager
 deliberately releasing confidential information in the form of advice from the Department
of Planning and Infrastructure that was provided to Anthony Stavrinos on 26 November
2012 and an email from the Council's group manager of environment and planning that
was sent to Norman Cerreto on 27 June 2012, in both cases with the intention that the
information would be provided to Mr Goubran and used by him for his benefit
 deliberately releasing Council information that he knew to be confidential to John
Mahony in relation to the proposed Ryde civic precinct redevelopment.
The Commission found that John Goubran engaged in corrupt conduct by arranging through
Tony Abboud to convey a threat to Mr Neish implying that Mr Neish's position of Council
general manager would not be safe after the 2012 local government elections unless Mr
Neish agreed to establish a community consultative committee to consider the Ryde civic
precinct redevelopment. The ultimate result of the establishment of this committee would be
that the redevelopment would be delayed until after the local government elections.