Case Study –
FOR THIS MAGAZINE, INTERNAL AUDIT PROVED HARD TO DIGEST

Janet Leonard
AC 562 – Auditing: An Operational and Internal Perspective Including Fraud Examination

This case revolves around the globally renowned company, Reader’s Digest. Best known for its popular magazine of the same name, the company is one of the world’s largest direct-mail publishing houses. As with other global companies, Reader’s Digest made a decision in the mid-1980’s to outsource a large portion of its direct-mail business to specialized mailing companies. Its Pleasantville, New York facility was to be converted into an office complex, complete with auditorium.

The company hired Terrence McGrane as its chief internal auditor. Mr. McGrane set up meetings with the company’s vice presidents in an effort to learn more about the company. In an effort to learn the accounts coding system, Mr. McGrane borrowed some recently processed invoices from the accounting department. He then proceeded to his first scheduled meeting with the vice president of administrative services, Mr. Harold Scott. Part of Mr. Scott’s duties involved the oversight of construction projects, as well as maintenance services.

According to the Association of Certified Fraud Examiners’ 2006 Report to the Nation, 25% of all fraud in large businesses is discovered by accident. Such was the case with Reader’s Digest. When Mr. McGrane showed Mr. Scott the invoices he had retrieved from accounting, Mr. Scott was surprised to discover that his name was on the invoices; however, Mr. Scott denied signing them.

Further investigation showed that the forgeries were for invoices for the painting division. There was only one employee to oversee these operations, a Mr. Albert Miano. The painting division had a yearly budget of approximately $500,000. Mr. Miano’s job was to coordinate both labor and