Dentistar, Inc. was formed in 1985 to provide dental and orthodontic services to subscribers of their prepaid dental plans. This report examines the western region’s office, located in Los Angeles, and its issuance of excessive manual checks that resulted in multiple bank overdrafts. Results indicate that only minimal efforts have been made for internal control measures in this office and companywide, and that weaknesses have allowed the Finance Coordinator to embezzle funds. There are many issues to be addressed, and several remedial actions to be taken to prevent these types of losses going forward. Strengths in the internal control system
Dentistar’s internal control system has some strengths, including its detection policies, limits on access to data, and the review of operational results. When implemented properly and consistently, these controls can help to ensure the soundness of the system long-term.
In processing manual disbursements, the Director of Administration (Sally Trust) receives support documents and calculations for the amount of payment from the Finance Coordinator, and then checks for completeness and correct calculation before approving the transaction. Additionally, separate employees are responsible for preparing checks and for authorizing checks. This type of preparation and approval system is vital for internal control and fraud prevention.
Furthermore, Dentistar restricts access to information such as the general ledger and non-maintenance customer information items. These features are accessible only to pertinent departments that can’t initiate transactions affecting the information within, creating difficulties in hiding unethical behavior and ensuring consistent reasoning and format.
Finally, review of financial statements and bank records at the closing of a period can highlight areas with potential for misused funds, or the need to alter budgeting procedures. For Dentistar, corporate accountants prepare P&L statements that are compared to budgeted figures, and reconcile bank accounts to make sure transactions are accounted for. These reports are passed on to management in each region for review, which helps identify triggers for control problems. Weaknesses in the manual cash disbursement process
There are numerous ways that the manual cash disbursement process is inadequate, making the system highly susceptible to fraud. Specific problems include the process for documenting transactions, detection norms, personnel and segregation of duties, slow communication and speed of updates, budgeting and planning deficiencies, and financial closing shortfalls.
When documenting manual disbursement transactions, the forms used to record information are incomplete in many cases, too repetitive in others, and visibly record confidential subscriber information such as social security numbers in too many places. These forms also require significant manual transfer of information, and create opportunities to hide devious actions. A copy of the documents should be kept for each step in the approval process to provide an audit trail, but the original is the only copy kept. Because no specific transaction information is entered into a computer, communication slows down and vital back-up information is left out.
There are also several issues with detection practices and the general concern for prevention. Manual disbursement processing forms and check stubs aren’t matched up to proper support documents. When the Director of Administration reviews a request, she merely checks to see that the proper type of information is recorded and that the amount of the refund is correct based on what is written. She doesn’t refer to the subscriber tracking system to make sure that the information is accurate or that the request is for an active subscriber. Further, although the responsibility for signing checks is given to Sally Trusts, she allows the Finance...