WESTCHESTER DISTRIBUTING, INC

QUESTIONS #3
What should Vince Patton do in respect of Carter Mario, George Pavlov, and Joe Roberts? Should each individual be handled the same way?

Existing Internal Controls within Westchester Distributing Inc.

A brief Standards of Conduct (EXHIBIT 2) with no elaborate system of internal controls. Segregation of duties not implemented due to limited number of staff. All cash disbursements handled directly by Patton and Elizabeth. Reinbursement for lunch expenses must be submitted with receipts. Broken bottles credits paid by salesperson were submitted for reimbursement without accompanying receipts. Neon signs and other point-of-sale merchandise stored in Westchesters main warehouse in which salespeople,sales managers,merchandisers and drivers all had access.Control mechanism existed but not strictly adhered.

INTERNAL ISSUES WITHIN WINCHESTER DISTRIBUTING INC:

Involved minimal three-way interaction between Internal Controls, employee behavior and incentives. Whistleblower Mr Moon revealed WDI salesmen illegally provided kickbacks to him, and in turn salesmen reimbursed themselves by filling fraudulent expense report. The case demonstrates problems when a company lacks Internal Control Case involved violation of ABC regulations by 3 employees. Falsified reimbursement request for broken bottles. Offered bribe in form of neon sign to customer Carter also made known of his disagreement with managements philosophy and operating style. (EXHIBIT 4) Formal written procedures did not exist to guide employees in internal control related matters. Pressure for performance is ranked high because of the bonuses that are based on sales quotas and the competitive beverage distributing market.

PARTNERS IN CRIME
Joe Robert. Bachelor in Management LSU (36) No:3 in company. VP Administration Offence. Had removed a neon sign from inventory. Handed them to Mr.Moon so as he would not be a whistle blower for the 100 cases that he had been induced to buy. Carlos Mario.MBA West Coast University (39) Driver. Offence. Had given $100 to Mr.Moon.Induced $30 to buy Rising Sun.Recovered $30 by submitting false luncheon receipt in his monthly expense report. Once caught leaving warehouse with products, not signed out. George Pavlov(33) GM Sales Offence. Contributed $70 to Mr.Moon.Recovered $70 by submitting fake lunch receipts and broken bottle claim.

What should Vince Patton do in respect of Carter Mario, George Pavlov, and Joe Roberts? Should each individual be handled the same way?
Vince is more worried of the repercussions of being reprimanded by ABC within closed door rather than to deal with the three guys. They now become secondary issue. Vince should handle these three guys the same way, as they are all in a collusion. If Vince Patton could have his own way, the three would definitely be fired. But he had second thoughts about it. What if Vince is to fire Mario? Again Vince is afraid that Mario might jeopardise WDI by going right to ABC and tell lies and Vince is convinced that the way ABC regulatory works, WDI would be close down for 45 days. The company cannot afford to pay its employees salaries for the shutdown perioded, 60 in numbers (Exhibit 1) and breadwinner to 128 dependants and looking at the scenario, even Mario have a chance to escape scott-free with ABC.

What should Vince Patton do in respect of Carter Mario, George Pavlov, and Joe Roberts? Should each individual be handled the same way?
Whats right for WDI? It is a personal decision that Vince have to make based on the facts of the case, the side effect and taking into account future provisions as to an improved Internal Control. After all It is the responsibility of WDI to develop and implement a sound system of internal controls. What Vince should do is to reprimand these guys. Suspend them for a while, or put them on leave. paid or unpaid if he must. But Vince should give them a second chance since the implimentation of Internal Control was not really intact, an open arms for fraudsters.Vince and Elizabeth will be seeking advice to tighten up the organisations internal control. All employees are to observe Exhibit 5 strictly. No two ways about it this time.

INTERNAL CONTROLS
Introduction Internal Controls are to be an integral part of any organizations financial andnbusiness policies and procedures. Some of the Objectives of internal controls are:
Protecting resources against waste, fraud, and inefficiency;

Ensuring accuracy and reliability in accounting and operating data; Securing compliance with organization policies; Ensuring compliance with laws and regulations; Evaluating the level of performance in all organizational units of the organization; Internal controls are simply good business practices.

The benefits of good internal controls are:

Prevents errors and irregularities from occurring. If errors or irregularities do occur, they will be detected in a timely manner. Ensures that issues arising from reporting errors are kept to a minimum and quickly resolved. Protects employees: By clearly outlining tasks and responsibilities; By providing checks and balances; and, From being accused of misappropriations, errors or irregularities

What are Internal Controls?

Internal controls practices are performed by organisation to provide management with assurance that assets are safeguarded and transactions are authorized, valid, complete and accurate. Internal control systems operate at different levels of effectiveness. Whether a particular internal control system is effective can be determine from the five components are present and functioning: Control Environment, Risk Assessment, Control Activities, Information and Communication, Monitoring Effective controls provide assurance from the accomplishments of established objectives.

Responsibility
It is the responsibility of WDI to develop and implement a system of internal controls. However, everyone within the WDI has some role in internal controls. The roles vary depending upon the level of responsibility and the nature of involvement by the individual. Vince Patton and senior executives should establish the presence of integrity, ethics, competence and a positive control environment. The department heads and managers of WDI have responsibility for internal controls within their units. Each individual within a unit has to be aware of the proper internal control procedures and need to comply within their specific job.

Components of the Control Activity

Internal controls rely on the principle of checks and balances in the workplace. The following components focus on the control activity: Personnel Authorization Procedures Segregation of Duties Physical Restrictions Documentation and Record Retention Monitoring Operations

Elements of a Good System

There are 4 elements in a good internal control system: Separation of Duties No person should have control over a transaction from beginning to end. Ideally, no person should be able to record, authorize and reconcile a transaction. Why? To protect employees; To prevent and detect intentional and unintentional errors; To encourage better job performance. Duties may be separated by department or by individuals within a department. Management should increase the review and oversight function when unable to sufficiently separate duties. Separation of duties can be circumvented by collusion

Elements of a Good System

Authorization Transactions should be authorized and executed by persons acting within the range of their authority. Why? To prevent invalid transactions.

Documentation
Transactions should be clearly and thoroughly documented and available for review. Why? Documents provide a record of each event or activity.

Appropriate documentation helps to ensure assets are properly controlled. Documents provide evidence of what really happened. Appropriate documentation ensures the accuracy and completeness of transactions.

Elements of a Good System

Reconciliation Reconciliation is the process of comparing the entries in the general ledger to supporting documentation and resolving any discrepancies or differences. Accounts Payable, Accounts Receivable, Cash, Property depreciation, Interest Income and others Why? To ensure the accuracy and validity of the entries and accrual balances. To ensure the records are accurately recorded. To ensure unauthorized changes do not occur. To resolve discrepancies in a timely fashion.

Internal Control Limitations

There is no such thing as a perfect control system. Limitations which may hinder the effectiveness of an otherwise adequate system of controls include: Resource constraints Inadequate skill, knowledge, or ability Degree of motivation by management and employees Faulty judgments Unintentional errors Internal Control Systems Depend On:
Size of department (number of employees).

Whether department is centralized or decentralized. Complexity of employee schedules. Level of managements monitoring and oversight.

Reference
INTERNAL CONTROLS 101: A Primer Dept of Finance & Management. Vermont INTERNAL CONTROLS

Claremont Graduate University