This paper critically analyzes the City of Wooten case describing the fact of elaborate embezzlement scheme. Mr. Peterman, Wooten's chief financial officer, demonstrated an unusual interest and suspicious vigilance when receiving incoming mail. As a result of his fraud actions that were conducted as an interception of checks sent to the city needs and their endorsement on his personal account, millions of dollars were misused.
Hall (2004) argues that internal control system has the following objectives: to safeguard the companys assets, guarantee that information in the accounting records is disclosed correctly, accurately, and it is reliable and proven, promote companys operations efficiency, implement the tool that will assist in auditing the compliance with the companys management prescribed policies and procedures. Internal control procedures are implemented with the aim to reduce risks or/and exposure. Internal control procedures provide preventive, detective and corrective types of control.
According to Turner and Wickgenannt (2013), internal control system composes five components. They are creating a controlled environment, risk assessment, information and communication, monitoring and control activities. Control activities include transaction authorization, segregation of functions, supervision, accounting records, access controls, and independent verification.
It should be highlighted that segregation of functions and independent verification as the components of internal control system was violated and made it possible for Mr. Peterman to perpetrate this fraud. The process of mail sorting should not be assigned to a single person. Moreover, it was unacceptable that Mr. Peterman carried out the tasks of others employees and thus, violated the prescription of the procedural manual for the accounting department.
Turner and Wickgenannt (2013) define that management fraud is conducted by the top managers in chief financial officer or CEO. It usually takes the form of fraudulent financial reporting as a result of complex schemes and transactions and is aimed at improving financial statements of the company, increasing the stock price, having possibilities to be promoted or get additional bonuses in salary, delaying bankruptcy.
Employee fraud is conducted by employees representing the lower level of the organization, not the top management. It implies actions such as inventory theft, cash receipts theft, accounts payable fraud, payroll fraud, expense accounts fraud, which results will be used in personal purposes.
It is a complicated question whether Mr. Peterman conducted a management fraud or employee fraud. On one hand, there is clear evidence that he stole checks and endorsed them on his personal account. It is an employee fraud when an employee steals cash for personal gain. On the other hand, he is not an ordinary line employee but the chief financial officer, and his actions distorted the financial statements where cash inflow was not been displayed in a full size.
City's procedural manual prescribes segregation of duties with the aim to decrease the risk of fraud and misuse of companys assets. The roles and responsibilities are divided among three employees, which is an efficient tool of internal control over the recording process and guarantee of fullness, accuracy and timeliness of the accounting information disclosing. However, such integral parts of the segregation of duties as authorization, recording and custody (Turner & Wickgenannt, 2013) were sometimes concentrated in the hands of one person, Mr. Peterman, in violation of procedural manual that caused the hole in internal control process.
I think that there was no understanding of control procedures by the employees that can be applied to the top manager that means that the control environment was not built inside the organization. It is important to point out that a strict Code of ethics should be developed. In case, an employee observes the situations of professional misconduct, abuse of official duties, he/she will consult with the Code what he/she should do and will report to the CEO or to the boards of directors about a possible internal risk of fraud.
To answer this question, it is necessary to define that customer fraud is the situation of customers engagement in the check fraud, credit card fraud, and refund fraud (Turner & Wickgenannt, 2013). I consider the fact that business representatives sent checks to Mr. Peterman personally as a result of the professional agitation conducted by Mr. Peterman. Perhaps, he assured businesses that checks could be lost or distributed improperly if they were sent to the citys mailing address. It should be stated that reconciliation procedures should be applied to adjust whether all sponsors costs were used purposefully. It can be stated that it is not the customer fraud if the sponsor company requests the confirmation of the use of money and raises the question of possible machinations within the company.
It is important to recognize that internal control in public companies should be an obligatory procedure with the aim to assure that all primary documents are processed correctly; transactions are properly recorded in the accounting system. Such procedures have to be implemented with the aim to guarantee that all costs that sponsors sent were used to citys needs funding, strict supervision and control should be conducted (Graham, 2008).
Staff size and lack of additional costs are limitations to establish more efficient internal control system. Limitation of the small staff makes it impossible to implement an adequate segregation of duties and compensating control. Lack of available funding can be also the limitation. However, realignment of duty assignments can be an effective tool in such a case. It is needed to underline, that cost-benefit analysis should be conducted when implementing specific internal control and assure that benefits exceed costs.