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50. Tenkey Book Company operates a chain of retail bookstoresthroughout the United States. Sandra Hawthorn, Tenkey’s controller,runs a fairly tight internal control system, with rigorousrequirements for the segregation of duties throughout the company.Even the best systems can have problems, and recently someonecalled in a tip to the company’s anonymous hotline saying thatTenkey was losing a lot of inventory to employee theft and that theproblem was pervasive through many of the company stores. Thecaller left no details as to who was committing the thefts or howthey were being committed. Sandra was alarmed because inventoriesconstituted a large percentage of Tenkey’s assets, and if lossescould occur in even one store, they could probably occur in otherstoo. She called a staff meeting that included the IT director andthe general accounting manager. “We need a plan to investigatethis,” she told them. “Any suggestions.” Tom Clockspeed, the ITdirector, jumped right in. “Let’s do a complete inventory of all ofour stores,” he said. Anna Aburida, the general accounting manager,began shaking her head. “We’re not due to take inventory foranother six months. It would cost us a whole lot of overtime if wedo it now.” Sandra glared at Anna and said, “You’re just going tohave to do better than that.” “Okay,” said Anna. “We need a plan.Let’s start by considering likely suspects. Then we can evaluatethe internal controls surrounding everyone who might be in aposition to steal. There has to be a weak point somewhere.” “Thisis a little crazy,” said Tom. “You’re making all of these planswhen we’re not even sure if the phone caller was telling the truth.Let’s at least do an inventory of one store before we do anythingelse.” Anna frowned. “That’s great Tom. So what happens if weinventory one store and don’t find any inventory shortage? Thenwhat do we do?” Tom slid back in his seat and laughed. “Right,” hesaid. “But what happens next if you don’t find any controlproblems? Then we’ve just wasted time. And even if you do findcontrol problems, there’s no guarantee that fixing them will fixthe problem. And remember, we don’t even know for sure if we dohave a problem. Sandra pounded her fist on the table. “This isgoing nowhere. I’m going to bring in a forensic accountant to findout what to do.” a. If you are brought in as Sandra’s outsideforensic accountant, what advice would you give her? b. Whichemployees could be stealing inventory? Describe one or two possibleschemes applicable to this case.

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Lelia Lubowitz
Lelia LubowitzLv2
28 Sep 2019

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Ethics Case: Theft Reimbursement, Twice

I am the assistant controller at a medium-sized, not-for-profit organization. I hired a new accounts payable clerk three months ago—let’s call her Mary, which is not her real name—and then I fired her last week because she stole $16,583 from us by altering six checks. Mary’s primary duties were to key in all the accounts payable information, and then, after the checks were printed, to match all the supporting documentation to each check. She then took the checks to the signing officers. After they were signed, she mailed the checks and filed the yellow copy with all the supporting documentation in the paid invoices filing cabinet.

We pay each member of our board of directors a $2,000 honorarium. I prepare the list of the directors and how much to pay each director, which I give to Mary for inputting into the computer. Each honorarium check simply has the name of the director and no address or other information. We normally hand them to the directors during the meeting. Similarly, our expense report reimbursement checks only have the names of the individuals and no address or other information on the checks. We send those to our employees through the interoffice mail.

Well, after they were signed, Mary took four honorarium checks and two expense report checks, and changed the names on the checks to her name. All of our checks are printed on light green paper. Well, Mary used White-Out to alter the names, but she wasn’t very smart. It was obvious that the names had been changed from the White-Out used and her name wasn’t even the same font as the typing on the rest of the check. She took the checks across the street to an ATM machine and deposited them into her bank account. She then transferred the money to her family who live in another country.

I discovered the false checks last week when I was doing the bank reconciliation. She admitted what she did and we’ve had the police charge her with theft. Our bank was very apologetic and immediately reimbursed us the full $16,583. Our bankers admitted that the checks were so obviously falsified that they never should have cleared the bank in the first place.

Well, my problem is that, after I discovered the theft and before the bank reimbursed us, I decided to claim on our insurance policies. One of those policies is a check-protector service. Well, today we received a check for $16,583 from them. So, I took the check to my boss, the controller, and I was laughing saying that we’ve been reimbursed twice and that I was going to send the check back to the insurance company. Well, he said “No.” He told me to deposit the check into a high-interest savings account. “We’ll return the $16,583 to the insurance company after the court case is settled. In the meantime we’ll earn interest on the money and since we’re a nonprofit organization we won’t even have to pay tax on the interest.”

He said the interest represents the aggravation we’re going through. Well, there has been a lot of aggravation. The other accounting clerks felt terrible about Mary. They felt violated and abused because they had trusted her. We will also have to spend a lot of time with the lawyers and time in court at Mary’s trial. My boss’ attitude is that the interest on the extra $16,583 will cover all of these additional costs associated with the Mary fiasco. He also said that the bank deserves to pay the interest to us since they should never have cashed those doctored checks in the first place.

Well, I don’t think that this is right. But I don’t want to challenge him since I was the one who hired Mary. So, like, what do you think I should do?

Questions

1. What advice would you give to the controller?

2. What preventive and detective controls can be put in place to prevent this from happening again?

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