Torpedo Digital Company, a communications equipment manufacturer, recently fell victim to a fraud scheme developed by one of its employees. To understand the scheme, it is necessary to review Torpedo's procedures for the purchase of services.
Expert Explanation
To prevent the type of fraud perpetrated by Ross Dunbar at Torpedo Digital Company, it's crucial to enhance the internal control procedures related to the purchase of services. Here are several measures that could be effective in preventing this type of fraud:
Segregation of Duties: Separate the duties of service requisition, approval, and vendor management. Ross should not have had the ability to both request services and approve vendors. Specifically, ensure that no single employee has control over both initiating and approving service requisitions and vendor additions.
Vendor Approval Process: Implement a rigorous vendor approval process that includes background checks and a requirement to disclose any conflicts of interest. Vendors should only be approved after a thorough review by multiple departments, including procurement, legal, and compliance.
Verification of Services: Require verification that services have been performed before payment is made. Since no tangible goods are delivered, consider implementing a procedure where an independent party (someone other than the requesting manager) confirms the completion of the service. This could involve on-site inspections, detailed service reports, or photographic evidence of the work performed.
Audits and Reviews: Conduct regular internal audits and reviews of service transactions to ensure their legitimacy. Randomly select service invoices for a detailed review, including contacting the service provider directly to confirm details of the work performed.
Approval Limits and Dual Authorizations: Establish approval limits for service requisitions and require dual authorizations for service orders above a certain threshold. This ensures that multiple people are involved in the decision-making process, reducing the risk of fraudulent activities.
Conflict of Interest Policy: Implement a robust conflict of interest policy requiring employees to disclose any potential conflicts. Regularly train employees on the importance of adhering to this policy and the consequences of failing to do so.
Enhanced Communication and Verification: Enhance communication between the Accounting Department and other departments by requiring written confirmations of service completion from the requesting department, signed by a manager other than the one who requested the service.
Given the specific fraud scheme at Torpedo Digital Company, the best way to prevent this fraud would be a combination of the above measures. However, if we were to choose the single most impactful measure, it would likely be:
Implement a Rigorous Vendor Approval Process and Conflict of Interest Disclosure Requirement
This would prevent Ross from placing his uncle’s company on the approved vendor list without proper scrutiny and would have flagged the familial relationship, leading to closer monitoring of transactions with Capo Industrial Supplies and Service. Additionally, it would be wise to complement this with enhanced verification procedures for service completion to ensure that services billed were indeed rendered.
The purchasing agent is responsible for ordering services (such as repairs to a photocopy machine or office cleaning) after receiving a service requisition from an authorized manager. However, since no tangible goods are delivered, a receiving report is not prepared. When the Accounting Department receives an invoice billing Torpedo for a service call, the accounts payable clerk calls the manager who requested the service in order to verify that it was performed.
The fraud scheme involves Ross Dunbar, the manager of plant and facilities. Ross arranged for his uncle's company, Capo Industrial Supplies and Service, to be placed on Torpedo's approved vendor list. Ross did not disclose the family relationship.
On several occasions, Ross would submit a requisition for services to be provided by Capo Industrial Supplies and Service. However, the service requested was really not needed, and it was never performed. Capo Industrial Supplies and Service would bill Torpedo for the service and then split the cash payment with Ross.
In the case of Torpedo, which of the following would be the best way to prevent this fraud?
Answer : Have a person other than the manager requesting a service fill in the date and time the service was received and sign a service verification form.
Expert Explanation
To prevent the type of fraud perpetrated by Ross Dunbar at Torpedo Digital Company, it's crucial to enhance the internal control procedures related to the purchase of services. Here are several measures that could be effective in preventing this type of fraud:
Segregation of Duties: Separate the duties of service requisition, approval, and vendor management. Ross should not have had the ability to both request services and approve vendors. Specifically, ensure that no single employee has control over both initiating and approving service requisitions and vendor additions.
Vendor Approval Process: Implement a rigorous vendor approval process that includes background checks and a requirement to disclose any conflicts of interest. Vendors should only be approved after a thorough review by multiple departments, including procurement, legal, and compliance.
Verification of Services: Require verification that services have been performed before payment is made. Since no tangible goods are delivered, consider implementing a procedure where an independent party (someone other than the requesting manager) confirms the completion of the service. This could involve on-site inspections, detailed service reports, or photographic evidence of the work performed.
Audits and Reviews: Conduct regular internal audits and reviews of service transactions to ensure their legitimacy. Randomly select service invoices for a detailed review, including contacting the service provider directly to confirm details of the work performed.
Approval Limits and Dual Authorizations: Establish approval limits for service requisitions and require dual authorizations for service orders above a certain threshold. This ensures that multiple people are involved in the decision-making process, reducing the risk of fraudulent activities.
Conflict of Interest Policy: Implement a robust conflict of interest policy requiring employees to disclose any potential conflicts. Regularly train employees on the importance of adhering to this policy and the consequences of failing to do so.
Enhanced Communication and Verification: Enhance communication between the Accounting Department and other departments by requiring written confirmations of service completion from the requesting department, signed by a manager other than the one who requested the service.
Given the specific fraud scheme at Torpedo Digital Company, the best way to prevent this fraud would be a combination of the above measures. However, if we were to choose the single most impactful measure, it would likely be:
Implement a Rigorous Vendor Approval Process and Conflict of Interest Disclosure Requirement
This would prevent Ross from placing his uncle’s company on the approved vendor list without proper scrutiny and would have flagged the familial relationship, leading to closer monitoring of transactions with Capo Industrial Supplies and Service. Additionally, it would be wise to complement this with enhanced verification procedures for service completion to ensure that services billed were indeed rendered.
