A Business Relationship with Morris and Liberty at the Company - Research Paper Example

The case of the south eastern U.S city seems to involve many fraudulent activities and it involves different parties that are either affected or have affected the operations. The major parties involved in the case are: Poole; the municipal financial director and the treasurer of the waterway commission for the past 20 years. The first issue related to Poole was that he was unable to balance the city’s ledger which would as a consequence unbalance the Trial Balance and the Balance Sheet clearly showing misleading information to the stakeholders of the city. Secondly the problem pertaining to Poole was the issue of the insurance billings where the insurance billings were higher than the market rates charged and it was not reflected in the policy as well. Thirdly, the discrepancy related to Poole was his inability to compare the invoices with the insurance policy, hence approving inflated invoices. Finally, Poole approved and paid off bills which were over charged with respect to the commission. In all of these activities the major harm was inflicted on the city and the waterway commission. Poole, on the other hand, seems to have benefited from the scenario where he approved and paid off insurance bills with overcharged commission albeit there were other underwriting insurance companies showing a lesser amount which were unapproved by Poole. This scenario clearly suggested that Poole had received some sort of bribe or commission for approving and paying off inflated bills. The refund amount that was originally attributed for the city was actually taken up by Poole clearly suggesting that he was skimming. Allen; an insurance agent serving on the county commission for more than 10 years, lately as the chairman of the county commission. Allen shard an office building with Morris and there were many other activities in which both of them were heavily involved clearly indicating a collusion of interest between both the parties. The point that he favored Thomas Insurance Agency was the fact that he had his personal stake in the Insurance Agency and that he was in a position to enjoy the liberty of being the chairman by wrongly voting for Thomas Insurance Agency and earning a hefty amount as commission out of it. As the county commission also received bids from other Insurance companies, Allen also asked other board members of the county commission to vote for Thomas Insurance Agency and because of his prestigious position in the County Commission he was able to pull off such a fraud, this voting in favor of Thomas Insurance Agency helped Allen to gather his share of commission and other fraud that Morris was able to commit with his help. The amount of US $118,750 of the overbillings from the Thomas Agency for an administrative claims-handling agreement was shared between Morris and Allen equally; this service was neither needed nor approved by the city as some other insurance company was already providing such services. The commission received for providing health, life and dental insurance amounted to US $58,000. This amount was equally shared between Allen and Morris as it was due to Allen that the county commission voted for Thomas Insurance Agency to provide their employees with such health and other insurances. This act of Allen was totally against the Law of the state in which nobody was allowed to take up undue advantage of a position in a particular company and earn from it. Morris; an independent insurance agent and the general manager of the Thomas Insurance Agency. Besides such designation Morris was involved in selling insurance policies of different insurance companies as he was also an independent agent. Morris also had a private agency of his own as he used to divide the share of any fraudulent act between himself, Allen and his agency. Morris was involved in having a strong business relation with Allen and it would have been better not to commit into any other professional business agreement that would have created a conflict of interest between the parties and their respective employers or working places. Besides all such complications and issues both, Allen and Morris started doing business with each other using unethical methods. The legislative audit conducted revealed that Morris had overcharged an amount US $585,000 in the prior 5 years and an excessive amount of US $180,000 in the 5 year period prior to the audit was conducted. All this was done as Poole approved all the bills and paid back Morris via a check in the name of Thomas Insurance Agency, this check was further approved by Morris and the amount was properly divided between Morris, his own agency, Allen and Thomas Insurance Agency. This reflected a clear fault in the city’s internal controls. Besides this, Morris was also involved in getting money for the administration related service to the city, this service was not provided by Thomas Insurance Agency rather it was provided by some other Insurance company, this issue also showed a major flaw in city’s internal control system. The commission of US $58,000 was divided between Allen and Morris with Morris’s entitlement to the commission seemed half of the stated amount. Morris was also involved in bribing Poole, as he made the refund check in the name of Poole rather paying it to the city. Morris has been involved in cash larceny, he is able to take the cash and keep it himself which in reality pertains to the Thomas Insurance Agency, he has been able to take undue advantage of his position as the general manager of Thomas Insurance Agency. The definition of fraud found in the International Standard on Auditing (ISA-240) is: “ an intentional act involving the use of deception to obtain an unjust or illegal advantage”; all these activities committed by the parties involved above seem to be within the scope and the definition of fraud, fraud can be further split into two types: Fraudulent financial reporting – deliberately misstating the accounts to make the company look better or worse than it actually is Misappropriation of assets – the theft of the company’s assets such as cash or inventory. The parties considered above are involved in misappropriating the assets of their individual companies that they have worked for (Auditing Practices Board, 2004). Besides the parties considered above, the other parties that relate to the case are: City; a south eastern city of the U.S and it administration that gets its employees insured from Thomas Insurance Agency. County Commission; is a commission of the county in which Allen has worked as a chairman recently. It also gets its employees insured by Thomas Insurance Agency, besides Thomas, it also gets its other administration related work done by some other company as well Waterway commission; a local commission in which Poole was in charge of the treasury. Thomas Insurance Agency – a company providing insurance policies to the employees of the city, the waterway and the county commission. Morris was the general manager of the company and along with the help of Allen and Poole was able to extract cash in fraudulent manner from the commissions and the city; this cash belonged either to the Commissions, the city or Thomas Insurance Company itself. The culprits in the above case have been prosecuted and duly fined and imprisoned accordingly. Both Allen and Morris pleaded guilty and were given the same prison sentence but the difference was in the amount of fines and the penalties that they had to pay. Morris was to pay compensation of US $76,416 to the U.S. Internal Revenue Service (IRS) and a $12,000 fine. The city as a result received US $500,000 plus litigation charges as settlement from Morris. Allen on the other hand paid US $32,000 and was ordered to pay compensation of US $100,000 to the city and US $47,540 to the IRS. Poole was a difficult contestant to prosecute because of the lack of evidence against him but his statements that he gave to defend himself seemed suspicious. The statement Poole gave that he was unable to describe the service provided by Thomas Agency seemed awkward as he was the in charge of the insurance of city’s employees. Prior to accepting such agreement proper scrutiny should have been made of the insurance agreement made with Thomas Agency as the agreement was fraudulently made on such a letter having a letterhead used by Thomas Agency four years earlier. There are many factors that can alarm a fraudulent act before it is committed. There are certain activities carries out in a organization that clearly give a hint that there might be a chance of fraud or error if an activity is carried out wrongly or inappropriately. One of the red flags that trigger the warning signs is the fact that Poole was the only person in charge of the insurance of city. This situation can clearly point out that as a single person in charge, he is capable of doing any wrongful act as no appraisal is kept f his activity. Secondly the unbalancing affect of the city’s ledger clearly suggest that there might be some fraud or error committed within the daily operations. Thirdly Poole was the only one in charge of selecting the insurance company and paying them off as well. This supremacy of command has usually led many companies and organization to collapse over the years. Over the past years no statutory audit has been conducted of city’s operations clearly indicating that some frauds or errors committed might have gone unnoticed. An audit is usually very much necessary in any business or organization just to ensure that the company is performing well and to increase the stakeholder’s confidence in that particular company. Audits can always help in minimizing and sometimes eradicating conflicts of interest between the stakeholders i.e. the people that are running the business and those that are the owners of that business or organization. Same supremacy of power has been given to Allen and Morris where they are enjoying their prestigious positions in their respective organizations just for the sake of promoting their own interests and earning from them. Besides all these matters, no authorization or physical controls are in place to ensure that no discrepancy is committed (Handbook of International Standards on Auditing and Quality Control, 2009). To find any such discrepancies in all the organizations mentioned above, the auditors would have chosen many different substantive procedures. These substantive procedures would have been chosen by the auditors because the internal controls seem pretty weak and hence cannot be relied upon. Substantive procedures are those tests and other procedures (such as analytical techniques) that give direct assurance about the assertions in the financial statements. Using the substantive test provides the auditor with an assurance about the accuracy of the figures of the financial statements. ISA 520 states that the auditor may use analytical techniques as substantive procedures. The analytical techniques used to analyze the case could be: Ratio Analysis Proof in Total Trend Analysis The process is to create an expectation of the figure that may be derived of any particular transaction, such expectation is then compared with the actual figures and any particular differences are thoroughly investigated. The analytical techniques adopted by auditor in this case would be to keep a proper trend of the insurance policy for the last 10 years, any major fluctuations would have been questioned and proper authority of such fluctuations would be scrutinized. As there is a clear lack of authority and segregation of duties it would clearly suggest that there is a clear chance of some fraudulent activity to be carried. Such lack of authority, physical control, and segregation of duties within the city, the commissions and the Thomas Agency clearly suggest that the Internal Controls adopted and kept within them are totally weak and there is a higher susceptibility of fraud and error within the system. Hence it was finally the External audit carried out by the auditors that detected the fraud within the city (Auditing Practices Board, 2004). Logically, the more reliable a system is the more accurate its output will be as more reliable information will lead to better decision making. Hence internal controls are certain controls and procedures within an organization that help in putting up certain procedures to catch or to avoid and fraud and error. Better internal controls would lead the financial information to be less prone to error, play a pivotal part in fraud prevention and detection and would help in safeguarding the assets of a company. To ensure a proper internal control system five components shall be in place: Control Environment; is the communication of enforcement and communication of ethical values, proper organizational structure, proper assignment of authority and commitment of competence with greater participation by those charged with governance. The city’s case seem to lack proper control environment as there is no proper assignment of authority, only one man is given both the authority to select the insurance company and to pay them accordingly, there should be clear segregation of duties to discourage and such activities carried out by Poole and Allen. This issue is the same with the county commission where Allen was in charge of selecting the insurance company and also served as the chairman of the committee. In Morris’s case too there was also a lack of supervision and authority which led Morris to commit fraud freely. The entity’s Risk Assessment process; the risk assessment procedures at the commissions and the Agency seem to be fairly weak, better and robust procedures would lead to lesser risk of misstatement. The information system; the information system in any organization is the procedure both within IT and the manual systems, by which transactions are initiated, recorded, processed and reported in the financial statements. The information systems in the above case of all the entities involved were really weak and it is for that fact that their operations were more susceptible to risks and fraud. Control Activities; are the activities that are put in place to control the operation in such a manner that any fraud or error committed can be easily detected and dealt with. The lack of control activities in the case have clearly led to the faults that have been carried out by Allen, Poole and Morris. ISA 315 refers to five types of control activities that can help in reducing frauds and errors: Authorization, Performance reviews, Information processing, Physical controls and segregation of duties. All these control activities have not been carried out in the city, Thomas Agency or the commissions. Monitoring of Control; Monitoring of control means to investigate the effectiveness of any particular control. There is severe lack of control activities at the aforementioned entities hence monitoring of controls of almost equal to none (Aicpa, 2003). The internal control activities that would have been really helpful would have been the segregation of duties i.e. Poole should have been the in charge of recruiting the insurance agency and somebody else should have been involved in paying off the insurance policies. That too at the payment time there should have been two signatories in order to reduce any further chances of a fraud. As there was no competitive bid from any other insurance company, Poole might have an upper edge as to his direct involvement in appointing Thomas Agency as their insurance company. Therefore it would have been better to allow bid from different insurance companies. For the case of Allen it would have been better not to appoint him as the chairman of the county commission as he was an insurance agent as well. The position of chairman made him enjoy the liberty of selecting the insurance companies and to force or charm others to fall for his fraudulent trap. Before giving the chairmanship to Allen, proper record of his business relationships should have been kept, this would have helped in recognizing the fact that he was involved in a business relation with Morris and hence would definitely favor Morris. Morris, on the other hand was also able to enjoy liberty at the company, with him being the general manager. No proper authorization has been kept at the Thomas Agency; every decision of the general manager should be thoroughly scrutinized and checked by any superior officer before it is allowed. Segregation of duties in this respect can also help if two or more officials are kept when receiving the invoices from the city and the commissions. The general manager should only be involved in one activity only i.e. he should not be involved in both invoicing and receiving the cash, etc. All these activities carried out would have reduced the revenue of both the Thomas Agency and the city’s benefit. Besides the revenue, the cost of sales or the expenses of the city and the commissions would have increased when excessive amount was paid off to the Thomas Agency. There has been lack of controls within the organization and to audit such entities it is necessary that proper planning should be made. Proper planning of the audit leads to better understanding of the atmosphere in which the organization operates. Planning process would analyze and asses the risks, developing an audit strategy that could address such risks, selecting an appropriate audit team with the correct knowledge, assessing materiality and selecting appropriate audit procedures. The audit objectives would be to gather sufficient appropriate evidence and comment on the truthfulness of the accounts. When auditing any organization, the internal controls are usually seen, proper internal controls would mean less substantive procedures to be performed and greater reliance on the internal controls. These controls would be tested initially to ascertain their robustness and if any deficiencies are found, proper activities are carried out to reduce those deficiencies so as to reduce the risks of getting fraud and errors (Aicpa, 2003). BIBLIOGRAPHY Aicpa. Personal Financial Statements: Aicpa Audit And. [S.l.]: Amer Inst Of Cpa'S, 2003 Auditing Practices Board. International Standards on Auditing (UK and Ireland): Exposure Draft. London: Auditing Practices Board, 2004 Handbook of International Standards on Auditing and Quality Control. New York: Intl Federation Of Accounting, 2009 Read More