CASE of materiality may not be appropriate. The

 CASE 1:   

       Case 1 was focused on an accountant who ignored a one cent error in the bank reconciliation and finally received an IRS penalty.

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       A bank reconciliation is a process of matching the balance of the bank’s records to the company’s records for a cash account.  An employee needs to prepare a bank reconciliation to verify that these two sets of record are in agreement every month. The purpose of the bank reconciliation is to identify difference, omissions, and errors that can help companies detect fraud. The bank records should be exactly the same as the company’s accounting records. A minor difference is also important as it may reveal a big problem in the company. For example, an employee can make fraud by putting the debits in various ledger accounts with a lot of reconciliation transactions and made these accounts reconciles to a minor difference. As a result, the use of materiality may not be appropriate. The difference between those two balances may be caused by many reasons. It is necessary to set a cut-off date when fulfilling a bank reconciliation. The cut-off date is the last date on which it is possible to calculate the activities in the current period. The goal of the cut-off date is to ensure that the all the transactions and events are recorded in the same correct accounting period to ensure a company’s integrity of accounting process.




     The case of occupational fraud occurred in an energy service company owned by Jim Aaron in Baton Rouge, Louisiana (the company). Stacy Oxner worked for Aaron’s company for eleven years and was a trusted employee. When Stacy absent from work for a hip replacement, Aaron found several larger checks made out to Stacy with his signatures. However, he never signs blank checks.



     The fraud occurred as Stacy was the only employee who had authority to write and to issue checks. It is an opportunity for her to manipulate the accounting system as there was no oversight in the process.

      In this case, segregation of duties is a necessary thing. The same people cannot have the right to request and approve checks at the same time. The responsibility of operation and recording should also be separated. Segregation of duties can minimize opportunities for employee theft. For example, as this company is not a big company, the employer can make the bank send the monthly bank statement to home and sign all checks by himself. Bank reconciliation statement is a significant tool for small companies to ensure the accuracy of the amount of money in a company’s account. Verifying the records with the bank may help the employer detect fraud. In this case, if Aaron reconciles the bank statements once a month by himself, these errors may not be undetected for such a long time.

      In addition, not all employees are honest. It is important for employers to have professional skepticism. Employers could not blindly trust their employees even if their employees look dedicated and credible. Because they never know when their longtime employers have difficulties in financial lives, Employers’ blind trust increase the chance of friction.



Case 3


     This case was about Juan Martinez who was an owner of a company named Miami Rehabilitation Services (the company) and had the issues of the missing $1,400. He was certain that the money was stolen by his employee, Helen, but the police officer had no valid reason to arrest her.



     The fraud triangle consisting of pressure, opportunity and rationalization creates conditions for this fraud. Firstly, pressure is the motivation for a fraud. In this case, Helen suffered from the pressure of finance and family. Her husband was a substance abuser. Her oldest child had problems with learning and hyperactive behavior and had been to many different schools. Her second child had juvenile diabetes. Helen always had money problems and the chronic stresses of life made her felt short of breath. When Juan heard Helen’s complaining about her low salary, he was unable to understand her complaints and even threatened to dismiss her. Juan’s reaction was not an appropriate way to solve a problem, but in turn led to the increase of fraud as Helen was so desperate that she chose to acquire compensation by making a fraud. As an employer, Juan needed to really acknowledge the demand of his employees, which would help him to find red flags and take immediate measures. Secondly, opportunity is the measure that was used to defraud. In this case, Helen had an authority to post the payment of cash and checks into the software system and to make the bank deposits. June and his partner had established policies long ago but it had not been performed in the following years. As a result, no one followed Helen’s activities. As an owner of a small company, Juan should take the responsibility of oversight. Finally, rationalization is the act of reconciling an individual’s behavior with accepted notions. At the beginning, she gave herself a rationalization that her salary was too low and her choice was based on satisfying nothing more than life’s basic necessities so his family could enjoy a better living. She justified his behavior to be acceptable.

      Control activities are the actions to establish and execute policies and procedures that can ensure that management directives are effectively carried out. Segregation of duties and performance reviews are two kinds of control activities. In this case, Helen had an authority to deal with the cash and checks. She could post the payments and make the bank deposits. In addition, she had access to make and receive collection calls. She also could prepare a “write off” list monthly. It is obvious that the company was a lack of segregation of duties. Additionally, Helen’s activities were not monitored by anyone which indicated that the company lack performance review.

     Ethical values, on-going monitoring, and establishment of authority and responsibility are three aspects of the control environment and monitoring. Firstly, all the employees should acknowledge an ethics code of conduct. This code is to help employees behave properly in an ethical manner. Secondly, performing on-going monitoring can ensure that all the components of internal control continue to work effectively as assigned. Thirdly, it is necessary to establish appropriate authority and responsibility such organizational operating plans, employee job descriptions and so on. In this case, the employer should restrict Helen’s authorization to approve write-offs which can reduce the risk of fraud.

     In this case, Juan missed the red flag of Helen’s behavior. Helen never took a vacation. She refused Jim’s wife help in substituting for her job when she was pregnant and returned to work immediately after childbirth. In addition, Helen was unwilling to give the post office box key to anyone else. Those are all indications that Helen had problems in her job and she did not want to expose her job. Joan and Maria also missed the red flag of Helen’s personal information. Helen’s husband involved in a substance abuse and her children had problems with learning and hyperactive behavior. Furthermore, Helen never bought a new frock. Those are all indications that Helen’s family was financially difficult. As the company’s financial statement was uncreditable, it is more efficient to deal with the records from the third party. For example, the revenue records can be collected from payment from the third-party payers. Those records can be used to match with the bank statements to see if any differences exist. If there were not enough records to compare to, the company can also use horizontal and vertically analysis to see if any unusual data records exist. For example, analyzing the increasing expense ratios can help the company to detect the fraud.

     Segregation of duties involves four responsibilities: authorization, custody, record keeping and reconciliation.  No one can take two or more responsibilities at the same time. It is an efficient way to reduce the risk of fraud. In this case, as Juan’s company is a small company, there may not be enough employees to take those responsibilities separately. However, custody is still necessary to be separate from others. Juan and his partners can also take this responsibility by themselves. Additionally, job rotation is also a good way to detect frauds. It can reduce the risk of collusion and it is also a food opportunity to train employees.

    Separation of duties and job rotation can prevent errors, inaccuracy or fraud before it occurs. Monthly reconciliation of bank accounts, reconciliation of petty cash accounts, and conducting physical inventory are all examples of detective controls. Preventive and detective controls are often required in combination to provide sufficient protection.






Bank reconciliation. (2017, July 28). Retrieved from