Levon Helm was a kind of one-man mortgage broker. He would drive around Tennesse

Question

Levon Helm was a kind of one-man mortgage broker. He would drive around Tennessee looking for homes that had second mortgages, and if the criteria were favorable, he would offer to buy the second mortgage for “cash on the barrelhead.” Helm bought low and sold high, making sizable profits. Being a small operation, he employed one person, Cindy Patterson, who did all his bookkeeping. Patterson was an old family friend, and he trusted her so implicitly that he never checked up on the ledgers or the bank reconciliations. At some point, Patterson started “borrowing” from the business and concealing her transactions by booking phony expenses. She intended to pay it back someday, but she got used to the extra cash and couldn’t stop. By the time the scam was discovered, she had drained the company of funds that it owed to many of its investors. The company went bankrupt, Patterson did some jail time, and Helm lost everything.

What was the key control weakness in this case?

Many small businesses cannot afford to hire enough people for adequate separation of duties. What can they do to compensate for this?

Explanation / Answer

What was the key control weakness in this case?

Ans: Key control wekaness in this case was that, there was no second point of check to verify the accounting done by Cindy is correct or not. Levon should have hired one more person to verify the work of Cindy.

Many small businesses cannot afford to hire enough people for adequate separation of duties. What can they do to compensate for this?

Ans: If Levon cannot afford to hire enough people. then he should have verified the work of Cindy.

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