In October 2014, a former Smucker employee, Mark Kershey, was charged with defra

Question

In October 2014, a former Smucker employee, Mark Kershey, was charged with defrauding the J.M. Smucker Company of more than $4.1 million over a 16 year period. Kershey was the chief airplane mechanic at the company's hangar at the Akron-Canton Airport in Ohio from 1990 until he was discharged by Smucker in 2013. From 1997 until he left Smucker, Kershey invoiced Smucker for more than $4.1 million by using a fictitious entity he created. He billed Smucker for nonexistent parts and/or work that he himself actually performed as part of his duties as a salaried employee. Most of these invoices were for less than $10,000, which Kershey himself was authorized to approve. A supervisor to Kershey approved the few invoices that were for more than $10,000 based on his trust in Kershey. To earn- out his false billing scheme, Kershey set up a post office box in Lake Township in Ohio using the fictitious entity name of Aircraft Parts Services Co (APS). He (as APS) would then invoice Smucker using non-sequential invoice numbers, so it looked like APS was invoicing other companies too. Kershey used the proceeds to purcha.se and maintain two planes, several automobiles, and to make payments on his house. Kershey was eventually caught in late 2012 when three checks written by Smucker to APS totaling $44,000 were not cashed. When a Smucker employee questioned Kershey about the APS uncashed checks, Kershey indicated that APS had been sold to another Smucker vendor. The false billing scheme began to unravel and Kershey was fired by Smucker. The Special Assistant United States Attorney has charged Kershey with mail fraud following an investigation by the Federal Bureau of Investigation, Canton. Ohio. Charges were filed in October 2014 and the case is pending. 1. What internal controls could have been used to prevent Kershey from earning out the false hilling scheme? 2. What factors might have contributed to the weak internal control environment that allowed this scheme to exist for 16 years?

Explanation / Answer

Ans 1) Firstly there should have been a procurement team, any inventory items needed should be routed through procurement team. Procurement team upon getting the request of inventory would have done proper selection of right vendor asking the quotations from them and then selecing the best one of them. Request to the procurement team must to be made in the form of requisition slip, where in it has to be mentioned that which type inventory needed, why is it needed, and when it is needed, expected usage of it also has to be mentioned along with the estimation of it's worth. This requisition slip must have an approval from the head of the technical team despite of its amount.

There should have been an approval system, wherein each invoice has to be approved by atleast two people, let's say by supervisor of the procurement team and the the supervisor of finance team, should have also approved the invoice.

Once the inventory has received from the office, a inventory book should have been maintained listing all the inwards inventory and outwards inventory with the name who has received the inventory and who requested for inventory.

Internal audit should be performed for this, wherein auditor should establish that correct product are being purchased and are used by the technician. Internal auditor might also like to visit one of the vendor's establishment. So that its authentication can also be reviwed. In the internal audit pannel there has to be the persons from finance, marketing and enginnering back ground. The auditor from engineering back ground must do te audits of the work done by technician.

Ans 2) There was not audit happening, neither internal audit nor external audit. There was not a proper process for procuring a product. There was no approval system below the amount $ 10,000, that turned out to be hazardous.

There was not a proper team who would take stock of inventory. There was no vendor check happened. These all were the loopholes found into the smucker system that allowed this scam to run for such a longer period.

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