accounting-The information in the following paragraph was provided in the assignments

QUESTION

ACC3301 – Ethics Case

The information
in the following paragraph was provided in the assignments section of the ACC3301
Fall 2014 syllabus.

8.1
ETHICS OBJECTIVE:

To practice the ethics learning objective each
student will prepare a report applying the fraud triangle to an ethics
case. The case will be provided by
your instructor. The three components of the fraud triangle
are: (1) incentive, motivation, or
pressure to commit fraud, (2) opportunity to commit and cover up the fraud,
which is often due to weak internal control or lack of internal control and (3)
rationalization which is the mindset of the person involved in the fraud
justifying committing the fraud. The
report will comprise at least 5% of your final grade.

AN EXAMPLE OF THE THREE COMPONENTS OF THE FRAUD TRIANGLE:

An example of the
three components of the fraud triangle would be Walt Pavlo’s reporting of
incorrect accounts receivable data in the World.com financial statements,
resulting in fraudulent financial statements being published. Walt Pavlo had
pressure to commit fraud because his supervisors expected his Accounts
Receivable department to always meet the projected collections numbers set by
management. Thus he created ways to cause the accounts receivable accounts to
“meet” the projected numbers whether the accounts actually met those numbers or
not. He had opportunity to commit fraud because he had complete access to the
general ledger entries for accounts receivables and all subsidiary ledgers. He
recorded all collections, made contact for collections with all large
customers, and was responsible for determining which accounts would be
written-off as uncollectible and when those write-offs would occur.
Additionally he was the individual who created the collection of accounts receivable
journal entries, all write-off journal entries, authorized all the write-offs,
and reconciled the accounts receivable subsidiary ledgers to the general
ledger. Walt Pavlo rationalized his reporting of incorrect accounts receivable
numbers because he was doing what his supervisors wanted him to do. He
considered himself a good team player meeting the expectations of his supervisors.
This illustration
provides an example of (1) motivation through pressure to commit fraud (2)
opportunity through
weak internal controls over accounts receivable and (3) rationalization to
justify the fraud.

SEGREGATION OF DUTIES:

The concept of
segregation of duties is an effective accounts receivable internal
control. An example of this concept is
provided in the following paragraph.

Segregation of
duties: recording of accounts receivable should be done by someone who does not
have access to the subsidiary ledgers for accounts receivable and does not have
the authority to adjust accounts receivable balances through writing-off
accounts or issuing credit memos. Reconciliation of the general ledger accounts
receivable accounts (Accounts Receivable and Allowance for Doubtful Accounts)
should not be done by the same person who is responsible for recording accounts
receivable or is responsible to authorize account write-offs and credit memos.
Segregation of duties refers to separating recording journal entries to the
general ledger from handling of the subsidiary ledger accounts from authority to
adjust the accounts and from the reconciliation of the general ledger to the subsidiary
ledger for accounts receivable.

These
examples were prepared by Dr. Beverly Rowe.

Use the “Darren
Jones and AE&P Inc. – A Story of Sticky Fingers” case to prepare you
report. The case appears on the
following page.

Darren
Jones and AE&P Inc – A Story of Sticky Fingers

Darren
Jones has been the accounts receivable accountant at AE&P Inc. for 8
years. He has been a dependable employee
who completes his work in a timely and professional manner. Darren gets along well with the other
employees, has received recognition as employee of the month on several
occasions, and is known as the top batter on AE&P’s softball team. Darren recently moved into a large new home
in an upscale neighborhood. All seems to
be going very well in Darren’s life.

At
AE&P, the accounts receivable accountant (Darren) opens the mail, makes the
cash deposit, and posts payments and invoices to the customer subsidiary accounts. Darren provides the general ledger accountant
with the verified deposit slip from the bank to make the cash deposit entry on
the general ledger and a schedule providing the revenue account amounts from
the invoices for the daily customer billing entry . Each day Darren reconciles the general ledger
accounts receivable amount to the total of the accounts receivable subsidiary
ledger and reviews the customer accounts for any potential uncollectible
accounts. If there is an account that is
deemed uncollectible, Darren removes the customer’s account from the accounts
receivable subsidiary ledger and provides the general ledger accountant with
the information to prepare the write-off entry.

Five
years ago, Darren encountered some very difficult financial circumstances in
his personal life. He realized that
without some additional source of funds he would have to file bankruptcy. He was desperate to resolve his financial crisis. He decided that he would “borrow” some funds
from AE&P by taking cash from the cash deposit, covering his tracks by
falsifying the posting to customer accounts.
Darren convinced himself that if his supervisors knew of his financial
distress they would gladly loan him the funds.
Darren made a promise to himself that as soon as he could, he would pay
the funds back. However, Darren found
that he could not keep this promise as he continued to need additional funds to
support his family. Over a period of
five years, Darren diverted significant funds to himself, covering up the
diversion either by misstating the customer accounts in the accounts receivable
subsidiary ledger, recording fictitious discounts or returns for the amount of
money diverted, or writing off as uncollectible the accounts of customers whose
payments Darren deposited in his own personal account. As time passed Darren thought to himself that
he deserved the additional funds he was taking from the customer accounts. After all, he told himself, he had worked
hard for AE&P for many years without what he thought were the pay increases
or promotions he deserved. Darren’s
lifestyle had risen to a level that required he divert more and more of
AE&P funds into his personal account on a regular basis. Darren’s fraud was discovered when he was
unexpectedly out of the office for a couple of weeks following emergency
surgery. Darren’s supervisor gladly took
on Darren’s duties to help during Darren’s absence. While performing Darren’s duties, the
supervisor
discovered
a variety of questionable entries in the accounts receivable subsidiary
ledgers. Further investigation revealed
that Darren had stolen in excess of $250,000 from AE&P Inc. through his
accounts receivable fraud.

Required:
Apply the fraud triangle to the case clearly discussing each of the three
elements in the fraud triangle using the specific details of the case.

A case
written by Dr. Beverly Rowe for use in Intermediate Accounting II

ANSWER:

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