Case 11-18

1. Would you say this is a computer crime? Why or why not? Yes it is a computer crime. There is manipulation of data to dishonestly obtain money. Even though the fraud is happening over the phone it is using the lack of updated computer data to dishonestly obtain money.

2. What internal controls would you recommend that would enable the resort’s managers to prevent such offenses?

First, in order to get paid, Travel Agents must turn in proof that they are authorized agents. A list will be completed and maintained starting with all new business. Just by saying we are updating our records and now need proof you are an authorized agent is not an unreasonable request. If there is a license that expires, that license data must be kept on file and have some type of ERP automated pop up that notifies that a license is about to expire and an updated license is required.
I would also call a meeting and explain to all employees as of now, if an employee books a reservation when they are not authorized agents, they will be fired and will be prosecuted to fullest extent possible. This policy alone will detour employees from attempting taking advantage of the system. Once the first employee is caught, make it public and follow through with the termination and charges against them.
Also, not updating the Authorized Travel Agent list is unacceptable and punishable by termination (after a reasonable disciplinary actions such as verbal warnings have been given in the case of a true human error.)

3. Classify the controls that you just identified above as either preventive, detective, or corrective controls.

Most of my immediate actions are corrective. Then most of the long term solution actions are preventive. I do not believe in spending a lot of resources on detective actions if it does not make financial sense. Based on the four seasons having a broken culture, I believe fixing the culture through corrective and preventative actions is the best way to go.

Agents turning in proof of Authorized Agent is both corrective and preventive. Compiling a new list is preventive for the future but also corrective as it is setting the culture. Keeping track of expired licenses is preventive. Calling an employee meeting is corrective and preventive. The employees are lucky to not be fired and many may think they should be but I believe in second chances and fixing broken cultures.

4. How does the matter of accountability (tracing transactions to specific agencies) affect the problem?

It certainly makes it harder to identify who was committing fraud. As I stated above, in this situation, since many, if not most have been behaving unethically, I would give everyone a second chance with a zero tolerance policy. But in the future, one will have accountability based on the procedures I would implement and the corrective actions I would take.

Problem 9-13

a. List the internal control weaknesses in Alden’s procedures.
b. For each weakness that you identified, recommend an improvement(s).

•Raw materials
a. Raw Materials consist mainly of high-cost electronic components. The loss of even one can create a high financial loss for Alden, Inc. There is no consistent procedure for removing an electronic component. Some times the authorization is written and sometimes it is verbally communicated.

b. First, there must be a uniform consistent policy for when electronic components are removed. No more verbal requests as it does not provide a backup source document. All requests must be written. Also, there should be routine inventory checks. If possible, the checks should be twice a day so if an electronic component is found missing it can be isolated to a specific shift. If feasible, there should also be dual control for electronic components that are removed. Two workers from the storeroom should sign the written request. The supervisor should routinely audit and reconcile the requests with the inventory logs. Also, instead of a written request that may be lost or misplaced, a order input system should be created for long term. Short term, an actionable plan is to have a template that can be completed and emailed to a specified email address queue that only the stock room clerks and supervisors have access to.

•There are no perpetual inventory records
a. No inventory records make an inventory useless because someone can easily change the count records and steal the high cost inventory. Even if fraud was not the case, human errors happen. If someone misplaced one of the high cost electronic items it will not show up on the inventory sheets.

b. There must be an ongoing record of everything that should be in the inventory, which can be compared to the inventory count. Alden, Inc. should think about upgrading their technology to help automate inventory. If each item had a unique product code, which can be input into some type of database, which can generate a report to be used as a source document to compare to the physical inventory count, losses should be reduced. Alden should look at adding bar codes to each inventory item and purchase scanners, which can be used by the clerks. Inventory can be taken more frequently by just scanning the bar codes and comparing the reports from the database. When items come in and are removed, the items can easily be scanned. Alden,Inc, can take this a step further and have a module created or modified which will allow this inventory to be uploaded to an ERP system which will allow various people across the company to be able to review at any moment what is in the physical inventory.

•After the physical count
a. The entire reorder process needs to be modified. First, the supervisor reviewing quantities is ok but this process is being done in a vacuum. Neither the Supervisor nor the Accounts payable clerk are reviewing market costs of products. They are not comparing vendor costs. Once the Accounts payable clerk receives an order they prepare a predetermined order and mail it. The Accounts payable clerk is basically exercising no thought what so ever.

b. First, Alden should consider having someone experienced in purchasing raw materials handle the new purchase order. If Alden invests in an inventory database or ERP system, someone in the purchasing department can be given the inventory counts and make the purchase. Now, if Alden already is confident they have a good supplier or raw materials or they have signed a contract, they should discuss a way that the ordering process can be automated. The supervisor and Accounts payable clerk are not exercising any thought they are just processing transactions. It will be more efficient for the orders to be automatically generated by the ERP system and then electronically sent to the vendor. The supervisor or purchasing agent can still inspect reports that will be generated as source documents and reconcile their inventory. The fact that the electronic process will happen so quickly will be a lot faster than the mail and save on postage. This type of system is a big part of why companies like Wal-Mart and Amazon are industry leaders and have a competitive advantages.

•When ordered materials arrive at Alden
a. This process is a fairly good one however in the big picture, this process is not as good as scanning the received inventory into a database or ERP system.

b. If the clerks scan the inventory into a database or ERP system, then print the scanned items report, and use that report to compare to the bill of laden, the information will already be stored in the ERP and ready to use by other departments. They should continue to initial both the bill of laden and the scanned in item report and keep them as back up source documents which will be used by the supervisor during audits and inventory counts.