Integrated Cases Chapter 5

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CHAPTER 5: Integrative Case-
Northwest Industries


December 3, 2011

Information Management

Immediate Issues or Problems

* Is there an existing fraud in the payroll system of Northwest Industries? * What courses of action should be done by Northwest Industries to prevent and detect fraud? Basic Issues or Associated Issues

* All of the 1,500 company employees of Northwest Industries had a discrepancy between their reported withholding and the actual amount withheld. * The W-2 of Don Hawkins, a programmer in charge of the payroll system, showed that thousands of dollars more in withholdings had been reported to the IRS than had been withheld from his paycheck * What are the factors that motivate to commit fraud?

Issue Analysis or Information Summary
Issue Analysis or Information Summary

Issue Analysis or Information Summary

Our society has become increasingly dependent on accounting information system, which have grown increasingly more complex to meet our escalating needs for information. As system complexity and our dependence on system increase, companies face the growing risk of their systems being compromised. Managers should be alert to the possibility that unusual events or transactions could be symptoms of fraud or attempted fraud. Fraud may also be highlighted as a result of specific management checks or be brought to management’s attention by a third party. Fraud takes two forms: misappropriation of assets and fraudulent financial reporting, either the two fraud has a harmful effect in the overall organization. There are three present conditions when fraud occurs. First is pressure that motivates a person to commit fraud. Second is Opportunity that allows a person due to situation to commit and conceal fraud. Third is rationalization that allows perpetrators to justify their illegal behavior. Prevention is the key to make fraud less likely to occur.

During the latter part of the year, the payroll system had undergone some minor modifications. Don had been in charge of the project. Due to pressing problems with several other projects, the payroll project had been completed without the usual review by other systems personnel. Jason arranged for a member of the audit staff, who was a former programmer, to review the code changes. She found a few lines unusual code in the program for generating the withholdings report for IRS. This code subtracted $5 from employees’ withholdings and added it to Don’s withholdings. Don got his hands on the money when IRS sent him a huge refund check.

It appeared that Don intended to use the scheme every year, as he not removed the incriminating code. He must been fairly confident of his scheme, because he had not tried to modify the company’s copy of the withholdings report. Somehow he knew there was no reconciliation of withholdings from the payroll records with the IRS report. It was a simple plan, and it could have gone undetected for years if Jason had not overheard someone in the cafeteria talk about a $5 difference.

Alternative Solutions or Options:

* Engage Forensic Auditor

Benefits that can be obtained by utilizing forensic auditors include revealing any potential areas of questionable concern regarding financial information or operations. Forensic auditors provide benefits in the form of exposing underlying fraud in the financial information. They make certain the financial information is a realistic representation by assessing the account presentation and accounting systems. They can offer suggestions for improving the information. In turn, this can save individuals and companies_money_and_potential_liability.

* Improve their internal control

Internal Control is a process implemented by board of director and management to provide reasonable assurance in safeguarding assets, providing accurate and reasonable information, promoting operational efficiency and complying with applicable laws. When...
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