Vol. 25, No. 4
American Accounting Association
Sunshine Center: An Instructional Case
Evaluating Internal Controls in a Small
Sandra K. Fleak, Keith E. Harrison, and Laurie A. Turner
ABSTRACT: Management and auditors face increased responsibilities to evaluate internal control and assess the risk of fraud. This case provides the opportunity to evaluate internal controls and the possibility of fraud in a very small not-for-proﬁt child care center, a setting that is easy to understand. The ﬁrst goal of the case is to identify internal control weaknesses by applying the COSO internal control framework in an environment that lacks many aspects of internal control. Interactions among the ﬁve components of the COSO framework provide the basis for analyzing internal control. The case requires students to consider possible misappropriation of funds using the fraud triangle. A secondary goal of the case is to introduce ﬁnancial reporting for a not-for-proﬁt organization as a means of accountability.
Keywords: internal control; COSO framework; fraud; not-for-proﬁt organization; ﬁnancial reporting.
Crisis de jour! Our director is not cooperating. And, where is the money going? I would like to be able to act rather than react. We must keep the place open!
arah, chair of the Sunshine Center Committee, and the Committee’s secretary, Olivia, talked almost daily about the operations of the Sunshine Center. “At least the children seem happy and well cared for,” Sarah reminded Olivia. “Yes,” Olivia agreed, “but if we cannot pay the bills and keep our help, we will not be open long to serve them. Rev. Andrew thinks everything will work out, but I am not so sure.”
The Sunshine Center Center opened several years earlier when the church allowed a member to provide child care services and pay rent to use the church facilities. The church’s administrative board reluctantly approved this arrangement, but the board speciﬁcally stated the church would provide no oversight of the child care program or ﬁnancial subsidy. Board members wanted to be clear that the church had no implied oversight or liability should something go wrong at the Center.
Sandra K. Fleak and Keith E. Harrison are both Professors, and Laurie A. Turner is an Assistant Professor, all at Truman State University.
The authors thank two anonymous reviewers and Kent St. Pierre editor for insightful and helpful comments.
Published Online: November 2010
Fleak, Harrison, and Turner
Although the Sunshine Center established a satisﬁed clientele, two years ago the Center’s founder decided to cease child care operations for personal reasons. The Center met a community need for child care, and Rev. Andrew, the pastor of the church, was convinced that the church should keep the Sunshine Center open as an outreach ministry. Some administrative board members were concerned about taking on the ﬁnancial responsibility for the child care facility when the church budget was already stretched. Others were concerned that closing the Center would cause ill will for the church in the community. Rev. Andrew strongly asserted that the child care facility would be ﬁnancially self-supporting, even though he had no data to support his claim. Swayed by Rev. Andrew’s position, the administrative board reluctantly agreed to integrate the Sunshine Center into church activities with the stipulation that child care ﬁnances be kept completely separate from the church budget. The board expected the Center to pay rent to the church for the use of facilities and utilities.
The administrative board formed a committee composed of four church members that met periodically to monitor Sunshine Center activities. The ﬁrst Sunshine Center Committee Committee included four church members with Rev. Andrew as an ex ofﬁcio member, none of whom had child care...