Conducting an Analysis of the Outstanding Dues and Creditors

JAE Limited is a company that has been affected by fraud committed by one of its clerks, Steve. The company's poor internal control and lack of segregation of duties allowed the clerk to carry out the fraudulent activities. Additionally, there was no internal audit function in place, which could have detected the irregularities earlier. The company also failed to keep track of the employee's use of corporate credit cards, which were used for personal purposes. This highlights the importance of having a robust accounting information system in place to prevent such instances from occurring in the future.

ACCOUNTING INFORMATION SYSTEM ASSIGNMENT

1
By student name
Professor
University
Date: 16 September 2017.
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Contents
Introduction……………..……………………..........……………………………..……………………...3
Question No.1…………..……………………..........……………………………..……………………...4
Question No.2…………..……………………..........……………………………..……………………...6
Conclusion……………....…………………………………..........……………………………..………….8
Refrences.....………………………………………………………………......................................9
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Introduction
In the given case study, JAE Limited is the company for which “Wizard Finance”, a company that
provides corporate credit card service enables the credit card for business use purposes at the
managerial level or above. This has been of tremendous help to the employees whenever they have had
to make some overseas trip or book international business class flights or extended hotel stays for
overseas assignment. (Aitchison, 2016) Though this was for business use only, but many executives of
JAE limited have also utilized it for personal purposes as well and have later on sent a cheque in the
name of Wizard finance to the accounts payable department to make out for the personal expenses
incurred.
All this did not go smoothly and the loophole of non segregation of duties has enabled the
accounts payable clerk, Steve Ray, to commit a big fraud with the company amounting to over $ 1
million. This has not only questioned the integrity of the working staff at JAE limited but on the company
as well in terms of the internal financial control being implemented and practices within the company.
(Capaldi, et al., 2017)Therefore, the policies and procedures which are currently built in place needs to
be reviwed in order to find out the deficiencies and build a strong control around them.
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Question No.1
In the light of the background information given about the company and the accounts payable
function in the company, there has been many factors which have led to the non identification of the
deficiencies and te fraud which was being prevelant in the organization. There was only a single person
responsible for collecting all the cheques which were to be paid to Wizard Finance, the entire control of
the account was in his hands which no reviewer and checker besides him or above him to scrutinise and
check the viability of his work. (Buchanan, et al., 2017) He was the sole owner of the accounts payable
department and the bank reconciliation is not in place which could have shown that the outstanding for
the banks were such huge amounts and were not being paidn in time to Wizard Finance even after
being followed up by the vendor and receiving the cheques from the vendors.
Since the card was given only for the business use, therefore when the clerk was aware that the
crad was being used for personal purposes, this should have been brought to the notice of the
management even though the same was being reimbursed by the employees in the form of the
cheques. This warranted for a summarized dashboard which would show the top 80% of the employees
who use it for the personal purposes alongwith the quantum of use. The period and the percentage split
between business and personal use could also have been shown such that the company’s management
would have been aware of the inconsistencies and the risk and could have avoided the same roping in a
new policy for the employees. The other factor which worked in the favour of Steve was that no rotation
of the role was there and he was fixed into the same role for a longer period of time which enabled him
to understand the loopholes of the process and utilise the same to his own benefit. In the organization
where continuous internal rotation is being carried out, the employees just cannot take benefir like this
as it would be caught immediately. (Félix, 2017)
Some other factors which helped in non detection of this fraud was the absence of the internal
audit system which if it would have been in place would have identified the fraud when it came to know
of the cheques from the employees not being deposited in the company’s bank account but being
transferred to his own. Further more, there should have been a reviewof the creditors and the accounts
payable on a monthly basis which was not in place. Accounts payable being a very important function
and affecting the factors like the working capital requirement of the company and the number of days
which the creditors give for payment of the outstanding dues, this needs to checked for the outstanding
balances through a summarized table which would show the ageing of the creditors along with the
amount due. The nature of the reasons due to which this hasn’t been paid for a long time should also
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have been a part of such a summary. Most of the companies have an internal control to analyse the
creditors which have been over due for a period more than 90 days but in this case, the company failed
to have the minimum control in place which would have guaranteed that the fraud being done by the
clerk is getting caught in the eyes of the management. Besides all the other factors, the most important
and critical deficiency was the non division of labour among the company structure and giving all the
responsibility with respect to the creditors in the single hand who could have done window dressing and
reported misstatements in the financials even. (Heminway, 2017)Besides having all the controls in place,
the company should have had a control that the confirmation message should go to the employees once
their outstandings are cleared so that they would also be able to confirm back. All in all, the mistakes of
the management is setting up a strong internal control and no analytical review being done at the end of
the period has resuled in such a being fraud in the company being unidentified for a long time.
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Question No. 2
There were many reasons and weaknesses in the current payables functions which persisted in the
company which resulted in the faud being taking place in company. The following is the brief list and the
recommendations for addressing the same so that it is not repeated in the future.
Weakness Recommendation for addressing the weakness
The account of Wizard
finance, being one of the
chief and big creditor, not
being reviewed by the
management.
In banking system , we see that the major accounts, payments and
collection above a certain limit is being checked everyday or atleast
aan exception report is being given to the management considering
some figure as the cut off mark which enables the management to
monitor the account more closely and find out any ineeficiencies or
problems, if any. (Anon., 2016) Moreover, from the management
review perspective, Wizard finance being one of the major creditors
should have been reviewed on a weekly basis such that the ageing of
the outstanding would have been known alonhwith the quantum.
This would have helped the company to know when the amount was
due and whether there was any major outstanding or fussy in the
account. Basis this, the monthly statement sent by Wizards finance
could have scrutized for top 10 or 20 expenditures.
Allowing business executives
and senior managers and
others to use for personal
use as wel besides the
business use.
The introduction of credit card by Wizards finance was to assist the
business executives and managers from unnecessary hussle and
bustle in case of urgencies, the business meeting overseas, the stay
over there at the hotel and several other official benefits but the staff
started to use it for the personal use as well, which was not the idea.
This should have been reported to the management and then the
management should have taken the call accordingly that whether
such an action should be allowed or not. In case, the management
would have agreed to it, they should have been shown the split
between the business and non business expenses. It could also have
been that the employees could have been charged interest on the
personal expenses as the company is anyways incurring so when it is
making the payment the Wizards Finance.
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No maker checker and
reviewer concept being
followed in the company i.e.,
the work done by a person
needs to be reviewed by
another person in the
system.
In most the listed companies, where there is requirement of the SOX
complaiance and the internal financial control being followed in the
company, we see that there is concept of maker, checker and
reviewer being followed such that the work done by one person, is
being reviewed by another and checked by one another person
before posting it into the final system and the financials. In this
company JAE Limited, the same should be implemented to have a
strong control on each of the processes and such that all that goes
into the final system and reporting is viewed through multiple eyes. In
this way, any fraud and error can be found in the initial stages only.
Segregation of duties was not
there as everything was
being controlled and
managed by a single person.
The major discrepancy which was found in the system was the non
segregation of the duties among different people. In case the receipt
of the cheques from the employees of the company, reconciling it
with the amount outstanding against every employee towards the
personal expenses, entering the transaction in the system, making
the payment to the Wizards Finance team through cheque, making
the bank reconciliation would have been done by different peopld,
there would have been no scope of making any kind of fraud or non
recording the transaction. The benefit of segregation of duty is that
the transaction do gets caught at some stage of checking as it is a
water fall approach and no transaction can escape from being
recorded. (Qi, et al., 2017)
No internal audit function in
place in the company which
is a mandatory requirement
considering the size of the
company and the revised
requirements by the
International Accounting and
Auditing Standards.
In case of the listed companies, there is a requirement of the internal
control function to be implemented so that entire finance process
and procedures, other SOX functions, internal control viability etc.
can be checked by the internal auditors and any discrepancies or
shortcomings, if any needs to be brought to the notice of the
management. This function in the company acts as an early warning
signal which helps in spotting the erros and frauds, if any being
carried in the company and internal audit is related to in-depth
scrutiny of the books of accounts and GL scrunity on a detailed basis.
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Conclusion
On the basis of the above observations and understandings, it is clear that the company was the
victim of fraud committed by one of its clerks, Steve because of the weak internal control being
practices in the company. Further more, there was non awareness within the management that the
employees of the company have been using the card for diverse purpose other than the business use.
Several weaknesses and the recommendations thereunder have been proposed to make the company
SOX compliant an such that the company doesn’t suffers iun future on account of such a blunder.
Besides all this, audit being one of the major functions in any company these days, should be
implemented and should be carried out with all the analystical and substantive procedures available so
that any discrepancy can be noted before hand only. (Li, et al., 2017) Besides all this, external
confirmation from creditors which is one of the major techniques being followed in company to check
the balances outstanding should be employed by the company to avoid all the above issues. All in all, it
can be said that JAE limited is lack of proper accounting information system in place and thus once this is
fulfilled or placed in the system, the accounting can be ensured to be free from such huge frauds.
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References
Aitchison, S., 2016. When is a done deal not done?: a legally enforceable contract. [Online]
Available at:
http://www.mondaq.com/australia/x/291480/Contract+Law/When+is+a+done+deal+not+done+a+legall
y+enforceable+contract
[Accessed 8th August 2016].
Anon., 2016. When is a Heads of Agreement legally enforceable?. [Online]
Available at: https://legalvision.com.au/heads-agreement-legally-enforceable/
[Accessed 8th August 2016].
Buchanan, B., Cao, C., Liljeblom, E. & Weihrich, S., 2017. Taxation and Dividend Policy: The Muting Effect
of Agency Issues and Shareholder Conflicts. Journal of Corporate Finance, Volume 42, pp. 179-197.
Capaldi, N., Idowu, S. & Schmidpeter, R., 2017. Dimensional Corporate Governance. CSR, Sustainability,
Ethics & Governance, pp. 175-187.
Félix, M., 2017. A study on the expected impact of IFRS 17 on the transparency of financial statements of
insurance companies. MASTER THESIS, pp. 1-69.
Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and
Organic Documents. SSRN, pp. 1-35.
Li, S., Sougiannis, T. & Wang, I., 2017. Mandatory IFRS Adoption and the Usefulness of Accounting
Information in Predicting Future Earnings and Cash Flows. SSRN , pp. 1-47.
Qi, Y., Roth, L. & Wald, J., 2017. Creditor protection laws, debt financing, and corporate investment over
the business cycle. Journal of International Business Studies, 48(4), pp. 477-497.
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