Abrams Company Case Analysis

In this part, I’ll show you four risk factors which may result in asset misappropriation we found in scenario 5. There are lack of segregation of duties and independent checks, lack of an appropriate system of authorization and approval of transactions, known personal financial pressures affecting employees with access to assets and lack of job applicant screening of employees with access to assets.

The first factor is lack of segregation of duties and independent checks.

Segregation of duties means the separation by sharing of more than one individual in one single task. It’s a kind of internal control which can help to prevent fraud and error. However, as we can see from this scenario that, Scott Smyth, the senior accountant in Junction Falls, is both the Cash Manager, who is in charge of maintaining bank relations and responsible for managing all city investments. We can see there is no segregation of duties at all! Scott could do whatever he wanted without anyone being informed because no one reviews what he's doing. As a result, he could steal cash and no one would know because no one counts the cash or reviews the transaction records.

Lack of independent checks means that there aren't any checks or balances in an internal control system. Just like Scott himself admits that he really likes the autonomy inherent in his position. He is the only one who decides what to buy and when to sell, and apart from creating a report of his investing activities for the Junction Falls Council each quarter, he manages the investment portfolio as he sees fit. Since Scott has the absolute power in investment without anyone’s supervision, he can readily steal from the company because no one will know where he has invested in.  

The second fraud risk factor is lack of an appropriate system of authorization and approval of transactions. As it is stated in the scenario, Scott also has broad authority to make wire transfers between each of the city's four bank accounts. No external approval is required. It’s quite dangerous for Junction Falls since Scott can easily steal from the company in the way of , for example, transferring money to his own bank account since there is no requirement of a second person to approve his investment plan.