Internal Control Weaknesses in Employee Fraud: Case Study of 7-Eleven

This report analyzes a case study of employee fraud at 7-Eleven and discusses the potential control weaknesses in the organization. It provides recommendations for dealing with these weaknesses and minimizing the associated risks.

ACCOUNTING INFORMATION
SYSTEM

Executive summary
This report analyses a particular article that review employee fraud. It leads to internal
control weaknesses in the organisation as the consequence. The case discussed on employee
fraud is on the 7-eleven franchisee restaurant chain in Australia in which owner paid the
salaries in cash to the employees so that they get the chance of paying them less and
exploiting them. This situation needs to be given more attention so that certain actions can be
taken and adoption of policy so that it can lead to minimising of the risk associated with
internal control weaknesses.

Contents
Executive summary....................................................................................................................1
Introduction................................................................................................................................3
Overview of employee`s fraud article........................................................................................3
Discussion and identification of potential control weaknesses..................................................4
Recommendation to deal with the internal control weaknesses and their implementation.......6
Conclusion..................................................................................................................................7
References..................................................................................................................................8

Introduction
This report brings out a discussion on internal control weaknesses, which is related to
medium small business. George is an inspector of the small medium businesses who has
undertaken the occurrence of employee fraudulent activities in business. Cyber security is
one of the most threatened activity that hampers the organisational performance. The report
discusses the case of 7-eleven and its background (Basu, Krishnan, Lee, & Zhang, 2017).
Further, there is brief discussion and identification of potential internal fraudulent activities in
the management by the manager and the owner of the 7-eleven franchisee group of Australia.
At last a strong recommendation based on wrong internal control conducted by the company
has been resolved through acts, regulations and strict policies so as to minimise the risk
associated with the weaknesses identified (Ferguson, and Danckert, 2016).
Overview of employee`s fraud article
Social norms of the trust an integrity are two important core values of business. These two
qualities, which makes SME successful still it is sceptical to fraud. Fair work ombudsman
recently undertaken fresh investigation regarding the scandal for the 7-Eleven after new proof
has emerged (Ferguson, and Danckert, 2016). This investigation reveals that franchisees are
exploiting the workers. It is seen that Fairfax Media have revealed that there were serious
allegations and breaches at the workplace in relation to its employees at one of the franchise
after it faced issues for wages fraud in the company (Ferguson, and Danckert, 2016). Further,
in order to resolve the issue, the company adopted a business model, which promoted
systematic underpayment of the employees with a widespread practise of the franchisees,
which pay their workers at low rate by coercing them so that they can pay a certain part of
their wages with the help of cash (Ferguson, and Danckert, 2016). The franchises were
exploiting the workers by making illegal cash back arrangement. It is seen that it is

significant internal weaknesses control such as collusion, wrong judgement, worker
exploitation, fail to train the employees, ill treatment to the employees, managing the
overrides and low payment to the employees. This fraudulent behaviour has led to has been
validly seen in 7-eleven where it has terminated the franchisee agreement (Newton, Persellin,
Wang, & Wilkins, 2015). By undertaking the detailed analysis of fraud, there were different
elements identified that satisfies the schemes of fraudulent. This case shows that it is
deliberate, secret underpayment of the workers, and illegal actions. It has led to fraudulent
conduction of actions where it lead to terminate the agreement of franchisee (Manurung,
Suhartadi, & Saefudin, 2015). Court`s finding says that Chaudhary`s actions-
Intentionally made unlawful demands of the workers for the secret payment in cash to pay
them less that was not at all lawfully entitled (Ferguson, and Danckert, 2016).
The court has identified the receiving the cashbacks that was not declared to ATO.
The finding by the court was found valid while analysing the condition of two employees as
it led to termination of franchisee agreement of 7-eleven (Ferguson, and Danckert, 2016).
Discussion and identification of potential control weaknesses
From the KPMG reports, it is seen that total number of frauds increased by sixteen percent
from $381 million in the duration of six months. It is seen that barometer reveals that fraud
has been has been relentlessly increasing in Australia (Said, Alam, Ramli, & Rafidi, 2017).
Public and private have been acknowledging cyber-attack as it is one of the most occurring
risk, which the company has been facing. The risk for fraud among the employees are
increasing as the business grow and engage diversified people, which are not among the
familiar and professional network. According to the ACFE (Association of the certified Fraud
Examiners) on occupational fraud reveals that there are 2690 cases in regards to occupational

fraud from the 125 countries in more than 23 different industries. Among these cases, half of
the fraud cases attribute to the internal control weaknesses (Media Centre, 2016).
It is seen that many of the employee frauds have led to business failures and insolvency. It is
important to take measures so that the organisation can undertake the measures to minimise
risks (Media Centre, 2016). It is important to consider that it takes little and no cost to
business entrepreneurs to prevent employees from the business failures. As it is owned by the
people who has longstanding enterprise and the personal relationships (Maddocks, 2017).
There should be complied code of conduct, which are used by the effective MNCs that will
enable them to maintain a considerable trust between owners, employees and the
management. The associated risk of fraud among the employees have the misappropriation
includes the siphoning the money from the bank accounts of the owner (Media Centre, 2016).
In order to conceal the fraud, employees in SMEs should have easy access to the business
financial statements (Maddocks, 2017).
In case of 7-eleven, although court has not required to orders in regards to remedies while
sorting the franchisees issue as there was number of inappropriate activities where the
performance in situations have been affected (Maddocks, 2017).
There is a need to business enterprises to remain vigilant to deal with the real risk of the fraud
among the employees also with the professional advisors to implement and design so that it
can manage the risk. These measures should be reviewed and regulated in order to respond to
the changes in the organisation (Maddocks, 2017). According to the Worrell Solvency
Forensic Accountants, they have four certified to fraud inspectors, network of the liquidators,
forensic accountants, and the bankruptcy trustees (Maddocks, 2017). It will help the 7-eleven
to have a deeper insight in the business processes among business structures and several
industries. In regards to treat, the activities related to repayment to the employees and

removing the stamp of fraud from 7-eleven (Maddocks, 2017). The company has undertaken
to improve, and increase the detection, investigation, and managing the risk accordingly by
identifying the capabilities of management in order to ensure that they will ensure to the
compliance (Harp, & Barnes, 2017). In order to improve the internal controls. The company
has to develop a written set of policies and process, perform timely reconciliations on the
timely basis, check and monitor by approving the process, maintaining the adequate
documentation, and provide sufficient training to the staff (Maddocks, 2017). Further, the
company should undertake a self-evaluation in regards to internal control so that it can
analyse the significance of prioritising to improve the employees performance (Harp, &
Barnes, 2017). As a resolution by the court for the 7-Eleven, court sort to the inappropriate
activities and their need to improve (Omar, Nawawi, & Salin, 2016).
Recommendation to deal with the internal control weaknesses and their implementation
The relationship between franchisee and franchisor, which is evident on the basis of
confidence and trust. Further, there should be an ongoing fulfilment from both the sides of
the franchise agreement, as it must include cooperation (Harp, & Barnes, 2017). This
litigation of cooperation and trust from both the sides, it is seen that there is a complete
breakdown of confidence and confidential trust made once the parties agree to enter into the
franchisees agreement. In case of 7-eleven, specific performance was inappropriate, as it is
likely to join parties in the continuation of that hostile relation (Donelson, Ege, & McInnis,
2016).
On the part of 7-eleven, the company undertakes many allegations of the illegal activity in
regards to the franchisees network, which turned extremely poor (Harp, & Barnes, 2017).
Any person with poof and the concerns in regards to several illegal practises at the store chain
in Australia, which was encouraged, by managers and the owner of Australian chain store of
7 eleven as it prompt to the investigation (Donelson, Ege, & McInnis, 2016). The chain has

Franchisees employee helpline, which is created to deal with the misconduct, illegal
activities, and the unethical that was raised issues and other concerns (Harp, & Barnes, 2017).
Over the last few years, 7-Eleven made significant investment for the industry leading
initiatives around the franchisee network that includes bio-metric system of time clock and
centralised payroll system (Donelson, Ege, & McInnis, 2016). It can increase field level
verification so that it can ensure that every store team member of host as well as the
franchisees to receive wages and other several conditions applicable to award. The franchisee
network of the company compliment to the Zero tolerance approachable to the wage
fraudulent (Donelson, Ege, & McInnis, 2016).
Conclusion
From the above discussion, it can be concluded that organisations operate in extreme
dynamic environment where it face lot of unknown challenges. These circumstances always
hinders the organisational performance. Internal control weaknesses often lead to business
failures and insolvency. These challenges are often internal and should be built under the
trust and confidence by creating an efficient code of conduct. 7-eleven felt regret on their part
as it led to face franchisees issues for the employees as the managers and owner of Australian
franchisees paid workers low.

References
Basu, S., Krishnan, J., Lee, J. E., & Zhang, Y. (2017). Economic Determinants and
Consequences of the Proactive Disclosure of Internal Control Weaknesses and
Remediation Progress in IPOs. Auditing: A Journal of Practice & Theory, 37(4), 1-24.
Donelson, D. C., Ege, M. S., & McInnis, J. M. (2016). Internal control weaknesses and
financial reporting fraud. Auditing: A Journal of Practice & Theory, 36(3), 45-69.
Ferguson, A., and Danckert, S., (2016). 7-Eleven's wage fraud sparks $170 billion blow back.
Retrieved from: https://www.smh.com.au/business/companies/7elevens-wage-fraud-
sparks-170-billion-blow-back-20160826-gr264h.html
Harp, N. L., & Barnes, B. G. (2017). Internal control weaknesses and acquisition
performance. The Accounting Review, 93(1), 235-258.
Maddocks, (2017). Franchisee fraud: 7-Eleven validly terminates franchise agreement.
Retrieved from: https://www.lexology.com/library/detail.aspx?g=856a8fb3-e9a9-
4f14-a172-392ba135ef23
Manurung, D., Suhartadi, A. R., & Saefudin, N. (2015). The influence of organizational
commitment on employee fraud with effectiveness of internal control and
organizational justice as a moderating variable. Procedia-Social and Behavioral
Sciences, 211, 1064-1072.
Media Centre, (2016). Response to allegations of wage fraud at a Brisbane store. Retrieved
from: https://www.7eleven.com.au/media-centre/article/response-to-allegations-of-
wage-fraud-at-a-brisbane-store
Newton, N. J., Persellin, J. S., Wang, D., & Wilkins, M. S. (2015). Internal control opinion
shopping and audit market competition. The Accounting Review, 91(2), 603-623.

Omar, M., Nawawi, A., & Puteh Salin, A. S. A. (2016). The causes, impact and prevention of
employee fraud: A case study of an automotive company. Journal of Financial
Crime, 23(4), 1012-1027.
Said, J., Alam, M. M., Ramli, M., & Rafidi, M. (2017). Integrating ethical values into fraud
triangle theory in assessing employee fraud: Evidence from the Malaysian banking
industry. Journal of International Studies, 10(2), 170-184.