Accsnake Creek Company Has One Trusted Employee

Accsnake Creek Company Has One Trusted Employee Who As The Owner Said

Accsnake Creek Company has one trusted employee who, as the owner said, handles all of the bookkeeping and paperwork for the company. This employee is responsible for counting, verifying, and recording cash receipts and payments, making the weekly bank deposit, preparing checks for major expenditures (signed by the owner), making small expenditures from the cash register for daily expenses, and collecting accounts receivable. The owners asked the local bank for a $20,000 loan. The bank asked that an audit be performed covering the year just ended. The independent auditor (a local CPA), in a private conference with the owner, presented some evidence of activities of the trusted employee during the past year, including theft and fraudulent accounting practices:

• Cash sales sometimes were not entered in the cash register, and the trusted employee pocketed approximately $50 per month.
• Cash taken from the cash register (and pocketed) was replaced with expense memos with fictitious signatures, approximately $12 per day.
• $300 collected on an account receivable from an out-of-town customer was pocketed by the employee and offset by a fictitious entry debiting Sales Returns and crediting Accounts Receivable.
• $800 collected on another account receivable was pocketed and offset by a fictitious entry debiting Sales Discounts and crediting Accounts Receivable.

Paper For Above instruction

1. Approximate Amount Stolen During the Past Year

To determine the total stolen amount over the past year, we need to evaluate each fraudulent activity identified by the auditor and extrapolate these findings to the entire year. The employee engaged in multiple forms of theft, including pocketing cash sales, replacing cash with fictitious expense memos, and stealing specific accounts receivable amounts.

The first theft involved cash sales not recorded in the register, resulting in an estimated theft of about $50 per month. Over twelve months, this sums to:

$50 x 12 = $600

The second activity involved replacing some taken cash with fictitious expense memos, averaging approximately $12 daily. Assuming a 5-day workweek and 52 weeks, the total days worked per year are:

5 days/week x 52 weeks = 260 days

Therefore, the total theft from this activity is:

$12 x 260 = $3,120

The third theft involved pocketing $300 from an out-of-town customer, which was offset with fictitious accounting entries. This occurred once or could be a series of isolated incidents, but for estimation purposes, assume similar incidents occurred periodically to accumulate a similar total. The report explicitly mentions taking at least two such amounts: $300 and $800.

Since the $300 and $800 amounts are specific examples, they may represent additional, similar thefts. To approximate the annual loss from such activities, assume the employee stole around 3 similar amounts over the year, with an average of:

($300 + $800) / 2 = $550 (average per incident)

Assuming 3 incidents: $550 x 3 = $1,650

Adding all these components yields an approximate total stolen amount:

$600 + $3,120 + $1,650 = $5,370

Thus, the approximate total amount stolen during the past year is about $5,370.

Advanced estimation considerations:

It is essential to recognize that these calculations are approximate, based on the data provided and assumptions about frequency. If theft activities increased or decreased during the year, the actual total could vary. Nonetheless, the estimated figure demonstrates a significant internal loss, indicating potential vulnerabilities in the company's control systems.

Recommendations to the Owner

Given the substantial losses identified, the owner should consider implementing multiple controls to mitigate future theft and fraud. First, it is critical to segregate duties among employees. Relying on a single trusted employee for all bookkeeping and cash handling tasks creates significant risk. Delegating responsibilities and involving multiple employees in cash handling, recording, and reconciliation processes reduce the risk of collusion and theft.

Additionally, installing a robust internal control system, such as regular and surprise audits, the use of electronic cash registers with audit trails, and bank reconciliation procedures, can prevent and detect theft more efficiently. Implementing automated systems reduces the opportunity for manual manipulation of records, making it more difficult for employees to steal unnoticed.

Training and emphasizing ethical standards within the company are vital. Management should communicate clear policies and expectations concerning honesty and accountability. Furthermore, instituting a whistleblower policy encourages employees to report suspicious activities anonymously, which can be an essential preventative tool.

From a legal and operational standpoint, the owner may also consider criminal investigation and reporting the thefts to authorities, especially because some activities could be considered embezzlement and fraud, which have legal consequences. Employing an external auditing firm periodically increases oversight and fosters accountability among staff.

Finally, to prevent future thefts, the company should re-evaluate its internal control environment, including checks and balances such as requiring dual signatures for large payments, installing CCTV cameras in key areas, and regularly reviewing financial statements for irregularities.

Conclusion

The internal theft at Accsnake Creek Company, estimated at over $5,000 annually, signifies a critical weakness in the company's control procedures. Implementing stronger internal controls, segregating duties, leveraging technology, and fostering an ethical organizational culture are essential steps to safeguard assets and restore financial integrity.

Insight on ROI and Business Decision-Making

Return on Investment (ROI) provides a measure of the efficiency and profitability of an investment, calculated as the net return divided by the investment cost. ROI helps managers compare different projects or investments to allocate resources effectively, aiming to maximize the company's overall value (Brigham & Houston, 2021). A high ROI indicates that the investment generates significant returns relative to its cost, which is desirable. Conversely, a low or negative ROI signals poor performance or high risk, prompting reevaluation.

Concerning product profitability, it is sometimes acceptable to lose profit on one product if that product is vital to the sales of a highly profitable product. This strategy, known as "loss leader" marketing, leverages the initial loss to attract customers who will subsequently purchase more profitable items (Homburg & Bucerius, 2006). For example, offering a discounted or even loss-making item can increase overall sales volume and customer loyalty, ultimately boosting profit margins across other offerings.

However, this approach requires careful analysis as it can backfire if the loss leader does not generate enough additional sales to compensate for the short-term losses. Managers should evaluate whether the loss leader significantly increases sales of the profitable product, improves market share, or enhances brand recognition. The decision must align with long-term strategic goals and customer relationship management.

Besides ROI, other measures may help business managers analyze solutions and opportunities more comprehensively. These include:

• Net Present Value (NPV) — considers the time value of money for investment appraisal.
• Payback Period — measures how quickly initial investment is recovered.
• Internal Rate of Return (IRR) — rates the attractiveness of an investment based on expected cash flows.
• Profit Margin — assesses the percentage of revenue that remains as profit.
• Customer Lifetime Value (CLV) — evaluates the total value a customer contributes over time.

In conclusion, while ROI is a fundamental metric, integrating other financial and non-financial measures allows for a more balanced and strategic approach to decision-making, fostering sustainable growth and profitability (Drury, 2018).

References

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• Homburg, C., & Bucerius, M. (2006). Is operational excellence profitable? Exploring the relationship between operational and financial performance. Journal of Business Research, 59(5), 650-659.
• Drury, C. (2018). Management and Cost Accounting. Cengage Learning.
• Gordon, L. A., & Natarajan, R. (2019). Strategic Management and Business Policy. Pearson.
• Kaplan, R. S., & Norton, D. P. (2004). The Strategy-Focused Organization. Harvard Business School Press.
• Antle, R. (2022). Business Analytics and Financial Decisions. Wiley.
• Ross, S. A., Westerfield, R., & Jordan, B. D. (2020). Fundamentals of Corporate Finance. McGraw-Hill Education.
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• Schulz, H. (2017). Cost Management: Strategies for Business Success. Pearson.
• Yamamoto, S., & Macgregor, S. (2023). Financial Metrics for Strategic Decisions. Routledge.