You are the owner of a local department store in a small town. Many of your empl

Question

You are the owner of a local department store in a small town. Many of your employees have worked for your company for years, and you know them and their families very well. Because your business is relatively small, and because you know your employees so well, you haven't worried about establishing many internal controls. You do set a good example for how you wish your employees to work, you are actively involved in the business, and you provide adequate training to new employees. One day, you become suspicious about an employee at a checkout desk. You fear that he may be stealing from the company by altering the day totals at his register. He has worked for you for 15 years, and he has always been honest and reliable. After several weeks of investigation, you discover that your fears are correct; he is stealing from the company. You confront him with the evidence, and he admits to stealing $25,000 over several years. He explains that, at first, he stole mainly to pay for small gifts for his wife and young children. But then last year, his wife lost her job, they had another child, and he wasn't sure how to pay all of the bills. 1. What elements of fraud are present in this case? 2. How might you have detected this fraud earlier, or prevented it from happening? 3. How will you approach your employee interaction and relationships in the future? 4. Do you feel a better system of internal controls, such as surveillance cameras and an improved computer system, is necessary or justified to prevent future frauds?

Explanation / Answer

1.

The elements of fraud that are present in this case are:

2.

The owner must have established internal controls such as internal audit, cameras, and daily tracking reports and so on. Establishing these controls might have helped the owner to figure out any fraud. Moreover, if these controls have been established earlier, then employees wouldn’t have dared to do fraud because of the threat of being caught.

3.

As most of the employees in the store have worked for years and owner has built a strong and friendly environment with them. It might be the possibility that most of the employees prefer working there because of the nature of the owner. Therefore, if owner starts to behave differently with them then this will hamper the working of the employees. In this situation employees can even switch to another job. So, it will be better for the owner to behave in the same way as he uses to. And for eliminating the chances of further fraud he should establish internal control system.

4.

A better system of internal control is obviously necessary or justified to prevent future frauds. This system will make the employee feel that their act is being watched. This will discourage them to do any immoral in the store. Because if they do any immoral or fraud, their activities can be easily traced and can be solely blamed for the action.

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