Accounting information systems

The case draws primarily from textbook material presented in Part II Control and Audit of AIS. However, please bring in external reference source(s) when responding to the questions or discussing the case. I suggest that you structure your paper as follows: 1) Summary of the Case (1-2 paragraphs) 2) Responses to the 4 questions 3) Concluding Remarks (1-2 paragraphs) – for example, if Rachel had not been a whistleblower, would Sandy have been caught? Would an improved computerized accounting system help prevent or catch this type of theft?

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From the series Ethics and Fraud in Business: Cases and Commentary. Names used are fictitious and do
not represent any real person or company. The AICPA neither approves nor endorses this case. The case
was developed with support from the AICPA Foundation. Copyright © 2003 by the American Institute of

Certified Public Accountants, Inc., New York, New York.

M A NA G E R P E R S UA D E S E M P L OY E E S TO U N K N OW I N G LY A L L OW
E M B E Z Z L E M E N T

B Y

J O NA T H A N S PA C K M A N , C PA

Sandy’s initial success at embezzlement prompted him to try it again. What led Sandy to
jeopardize his career and personal well-being, knowing full well that what he was doing was
wrong?

ABSTRACT

Businesses today rely heavily on computers to cut costs, increase transaction speed, create
competitive advantages and store vital information. This embrace of computer technology
often means moving to large systems and networks. Although these systems and networks
come with built-in controls, such as segregation of duties, they can never replace honest
management. In this case, a manager under financial pressure used his influence over his
employees to bypass the system controls. He was able to embezzle money until one
employee courageously stood up to his questionable procedures.

BACKGROUND

Duarf, Inc. owned several media businesses, such as newspapers, radio stations and
magazines. It operated in many of the largest markets in the United States and Canada. The
company had grown primarily through acquisitions over the past ten years and still used
several of the acquired business systems.

Last year, the company decided to centralize all of its accounts payable processing, such as
purchase orders, vendor maintenance, invoice processing and check printing. To accomplish
this centralization plan, the company purchased the latest technology. Following the
purchase, training sessions were held to ensure all processors and management could use all
of the system’s functions.

This technology included a robust database software package. The software provided
internal controls, including matching invoices to purchase orders and receiving reports,
signature dollar limits, segregation of processing duties and a controlled vendor list. All of
the internal controls associated with the software were adequately designed. They were
tested and found to be functioning properly within the system.

Before the centralization, Duarf, Inc. had eight separate accounts payable departments
throughout the subsidiaries that processed approximately 7,000 transactions per month. At
month-end, each department had to submit a consolidation package to corporate
accounting. After the centralization, the accounts payable department was processing

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approximately the same number of transactions but was staffed with fewer full-time
employees. Also, the consolidation process had been reduced to one package each month
instead of eight. Duarf, Inc. had realized the planned cost savings and management was
delighted with the results.

THE PROBLEM

Sandy Blanquet was a senior manager supervising the accounts payable process at Duarf,
Inc. Sandy started at Cloudy News, a mid-size newspaper, about ten years ago. When Duarf,
Inc. acquired Cloudy News two years ago, Sandy was the accounting controller. As a result
of the acquisition, Sandy was offered the opportunity to take part in centralizing the
accounts payable processing for all of Duarf, Inc.’s subsidiaries. After the centralization
process was completed, Sandy took on the responsibility of overseeing the entire
department, from opening mail to processing payables to cutting checks. He managed 20
employees through four supervisors. In addition to managing the department, he was a
check signer.

Sandy’s system access only allowed him to view accounts payable data. He could not process
any transactions, edit the vendor list or print checks. However, he did review all voucher
packages requiring a second signature. All checks had a facsimile signature printed by the
computer system’s check printers. Checks over $5,000 required a second signature (in other
words, Sandy’s signature). Checks over $50,000 required a third signature (i.e., vice president
or above).

FINANCIAL PRESSURE

Sandy had always enjoyed the high life. He drove a new sports car. He lived in an upscale
home. He took great vacations. Some might have said he lived just barely within his means.
Having just returned from an extended vacation to Hawaii with his credit cards closing in on
their limits, Sandy found that the advertising market had taken a turn for the worse. A
couple of months later Sandy was in trouble because most of his savings were invested in
Duarf, Inc. stock. He was overdue on his car payment and his mortgage. “If I can just get
some money, a loan or something, for a couple of months, I could get ahead,” he thought,
sitting at his desk on the fourth floor at Duarf, Inc.’s headquarters. He rubbed his eyes.
“Think,” he murmured, knocking the side of his head with his knuckles. Then it dawned on
him. “Ah. Maybe I can borrow some money from Duarf. A check. No one will miss it and I
will repay it as soon as I can.” He turned to his computer screen and started to form a plan.

Employee 1

Jack Cross started at Duarf, Inc. three years ago as a corporate accounts payable associate.
His primary responsibility was to process invoices paid by the corporate headquarters. His
work ethic and knowledge of the process were valuable assets to Sandy during the
centralization process. After the centralization was completed, Jack was promoted to senior
associate responsible for maintaining the approved vendor list.

“Hey Jack, this ‘Designing Pluz’ invoice was just overnighted to me with a rush on it from
some vice president at our Los Angeles printing site. Is this an approved vendor?” asked

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Sandy, sounding a little irritated. Jack looked up, slightly startled to see Sandy enter his
cubicle.

“No, I don’t see them in here,” Jack said, fumbling with the keyboard. “Do you want me to
add them to the vendor list?”

“Yeah, could you do that right now? I am going to walk this over to Mabali for processing.
Don’t bother with the verification form, it will take too much time,” Sandy added somewhat
curtly, knowing that if Jack completed the verification form, he would call the telephone
number on the invoice to verify the vendor’s information. Jack quickly added the vendor to
the list.

Employee 2

Mabali Smith recently returned from her honeymoon. She had spent three weeks in India,
touring and visiting relatives. Mabali started with Duarf, Inc. at the time of the centralization
and was an accounts payable associate with invoice processing responsibilities. Chris Topper,
a senior associate, reviewed her vouchers for posting.

“Mabali, I have a rush invoice here from the L.A. printing site. Are you busy?” Sandy asked
as he approached Mabali’s desk. Mabali, who was talking to her husband on the telephone,
quickly hung up.

“Oh, hi, Sandy. Uh, no, I’m not busy. Who’s it from?” sputtered Mabali, obviously surprised
by Sandy’s presence.

“It’s from some V.P. over there. He thinks he can just send me an invoice and expect it to be
processed immediately. Here is his signature.” Sandy pointed to the invoice. “Are you sure
you are not too busy?”

“Oh no. I’m not too familiar with this signature. Should I look him up in the authorization
limits file to make sure he can approve this invoice?” asked Mabali.

“Don’t worry about it. If he’s a V.P., he’s authorized up to $50,000,” counseled Sandy.
Mabali entered the invoice into the system.

“I can put this in Chris’s in-box and let him know it’s a rush job.”
Mabali suggested.

“Actually, I’m going to have Juan post it. I have to talk with him anyway.” Sandy took the
invoice and walked towards Juan’s cubicle, knowing that Juan had authority to override the
purchase order matching process.

Employee 3

Juan Namkaps started with Cloudy News five years ago, and had known Sandy for most of
those years. When Cloudy News was acquired by Duarf, Inc., Juan was offered a supervisor

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position in the accounts payable department. His primary responsibilities were to review all
of the purchase order matching exceptions and to supervise five associates.

“Juan, what going on?” Sandy announced as he approached Juan’s cubicle. Sandy sat down
across from Juan.

“Hey, Sandy. What’s up?” Juan said.

“Some V.P. at the L.A. printing site overnighted me an invoice and demanded that I run it
through ASAP,” Sandy explained while tossing the invoice across Juan’s desk. Juan picked it
up. “Can you post it?” Juan attempted to post the invoice, but it did not match any purchase
orders in the system.

“No P.O., Sandy.” Juan looked up and saw Sandy’s face starting to get red.

“What? You have got to be kidding me! He overnights me an invoice and there’s no P.O. in
the system,” Sandy blurted, looking past Juan at the computer screen. “Well, just override it
and I’ll have a chat with our L.A. friend.” Juan overrode the matching exception and posted
the invoice for payment. Sandy grabbed the invoice and stomped back to his office.

Employee 4

Darlene Beau was primarily responsible for printing the afternoon check run. She was hired
only three months ago but had experience with the system Duarf, Inc. used to process
payments. Knowing the check for this Designing Pluz invoice would require his signature,
Sandy telephoned Darlene. Sandy explained to her that there would be a special check in the
afternoon run and, since it would require his signature, he would save her time by reviewing
the voucher package himself. She willingly accepted and even thanked him for his
thoughtfulness.

Getting the check out the door

The check was printed, signed and mailed following the normal operating procedures.
However, it was mailed to a post office box owned by Sandy and he deposited the $32,450
into his new business account-“Designing Pluz.”

Repeating the job

Although the money did help alleviate Sandy’s financial pressures, he found himself wanting
to try it again. He realized that with the fake Designing Pluz account already on the
approved vendor list, he could easily push another invoice through the process. Less than
two weeks after the first phony invoice was paid, he attempted it again.

Sandy created another Designing Pluz invoice for $12,945. He was careful to keep the
amount low enough that both checks combined would not stand out on the L.A. printing
site’s monthly budget for actual analysis. He decided to use different accounts payable
associates to process the payment but to tell the same story.

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Employee 5

Rachel Nicki had been with Duarf, Inc. for two years. She was an associate whose primary
responsibility was processing supply invoices, such as paper, ink and press materials. Most
people did not know that she was married to one of Duarf, Inc.’s senior internal auditors
because she did not take his last name. Her husband had been working on implementing a
fraud hotline for the company and spoke to her often about it.

“Rachel, I have a rush invoice here from the L.A. printing site. Are you busy?”

“No, not too busy. Hold on, just a second,” Rachel said. Sandy had interrupted her in the
middle of processing an invoice. She finished up with what she was doing and asked, “Why
the rush?”

“Some V.P. over there wants it processed ASAP. Here is his signature.” Sandy pointed to the
invoice as he handed it to her. Rachel studied the invoice and the signature. She began to
open the authorization limits file on her computer, but Sandy stopped her. “Rachel, I really
don’t have time for that now. He’s a V.P.”

“I’m sorry Sandy. I have to check him out to see if he’s authorized to approve invoices,”
Rachel explained, looking curiously at Sandy. She found the file and began to scan it for the
name. She looked back at the signature and asked, “Is this Sandman or Zachvan?”

“Look, I appreciate your insisting on processing this by the book, but I really need this
processed now. Take my word for it, he’s authorized.” Sandy said.

Somewhat shocked by what Sandy had said, Rachel began, “When I process something, my
initials are input into the data record and I don’t put my name on anything unless it’s by the
book.” However, Sandy snatched the invoice and walked away before she could finish.

Two hours later, Rachel was still puzzled by Sandy’s behavior. She had a funny feeling about
that invoice and decided to call the company’s fraud hotline. The operator was pleasant and
let her know she could remain anonymous. The operator inquired about the situation, then
thanked her for the information. He explained that he would recommend an internal review
of the Designing Pluz vendor.

DISCOVERY

Two months later, Rachel received a department-wide e-mail saying that Sandy was leaving
the company. The e-mail added that Sandy would be prosecuted for allegedly embezzling
over $40,000.

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DISCUSSION QUESTIONS

1. Sandy Blanquet perpetrated the fraud in the case by creating a fictitious
invoice and personally walking it through the verification and payment
system. What type of fraud did Blanquet commit and what deficiencies in
internal controls enabled him to do it?

2. What is meant by the misappropriation of assets? What are the implications

of assets being misappropriated for the fair presentation of financial
information at Duarf, Inc.?

3. How might the fraud have been detected during an external audit assuming

the company had not corrected its books?

4. Assume that you are the new senior manager supervising the accounts
payable process and you want to impress upon the four employees involved
the importance of not allowing any other employee or member of
management to circumvent the company’s internal controls. What would you
say?