Lawrence Fairbanks, the assistant vice-chancellor of communications at Aesop University was allowed to make purchases for his department of under $2,500 without external approval. Unfortunately, he sometimes also bought items for himself, which included expensive antiques and other collectibles.
How did he do it? He replaced the vendors’ invoices that he received with fake vendor invoices. He was the one who created these fake vendor invoices. These invoices had descriptions that were more consistent with the communications department’s operations. He submitted these fake invoices to the accounting department, which in turn used these invoices as basis for their journal entries and to Account Payables as the basis for payment.
He was acquitted of taking a total of $475,000.
Internal control that Aesop University should have used is segregation of record-keeping from physical custody. An accountant should have neither physical custody of the asset nor access to it. Likewise, the custodian of the asset should not maintain nor have access to the accounting records. The custodian of the asset is not likely to convert the asset to personal use when one employee maintains the record of the asset, and a different employee has a physical custody of the asset. The separation of accounting responsibility from the custody of assets is especially important for cash and inventories because these assets are very vulnerable to fraud.
Segregation of Duties
Segregation of duties is vital in an internal control system. There are two common applications of this principle:
1. Different individuals should be responsible for related activities.
2. The responsibility for record-keeping for an asset should be separate from the physical custody of that asset.
The rationale for segregation of duties is this: The work of one employee should, without a duplication of effort,