Control at S&S Case

S&S’s success was outstripping their accounting information system. The consulting firm they hired made two recommendations. Before they changed to a new system, they needed to fix some of the problems encountered in the current system. It is not a good idea to rely on a new system to fix old problems. The second major recommendation was to hire an internal auditor to ensure that controls are developed that could then be incorporated into any new system. Susan Green and Scott Parry, the owners, decided that it would be a good idea to hire an internal auditor and give him or her the tasks of identifying solutions to problems in purchasing due to S&S’s growth while establishing controls.

That is how Jason Scott joined S&S as the internal auditor after a search for the right person by the consulting firm headed by Maria Pilinger. Jason had five years’ experience in a mid-sized accounting firm and had specialties in auditing and information systems. His family used to own and operate a number of retail stores and he grew up working in the family business throughout his high school years and while he was at university. His supervisor, Ashton Fleming, S&S’s accountant, asks him to trace a sample of purchase transactions from purchase requisition to cash payment to verify that proper control procedures have been followed. Jason is frustrated with this task, and for good reasons:

  • The purchasing system is poorly documented.
  • He keeps finding transactions that have not been processed in the manner that Ed Yates, the accounts payable clerk, said they should be.
  • Purchase requisitions are missing for several items personally authorised by Bill Spring, the purchasing manager.
  • Some vendor invoices have been paid without supporting documents, such as purchase orders and receiving reports.
  • Prices for some appliances and consumer electronics items seem unusually high, and there are a few discrepancies in item prices between the vendor invoice and the corresponding purchase order.

Yates has a logical answer for every question Jason raised and advises Jason that the real world is not as tidy as the world portrayed in university textbooks. Ashton also has some concerns:

  • S&S is one of the largest retailers and has a monopoly (major percentage) of the market.
  • Management authority is held by the company owners, Susan and Scott, and Susan’s nephew Bill (the purchasing manager), and now Scott’s son-in-law Ashton (the accountant). Several other relatives and friends are on the payroll. Together the extended family own 55% of the company.
  • Lines of authority and responsibility within the company are loosely defined and confusing.
  • Maria believes that Ashton Fleming may have engaged in ‘creative accounting’, sometimes called ‘earnings management’ to make S&S one of the best-performing retail firms.

After talking to Maria, Jason ponders the following issues:

  1. Because Ed Yates had a logical explanation for every unusual transaction, should Jason describe these transactions in his report?
  2. Is a violation of control procedures acceptable if management has authorised it?
  3. Maria’s concerns about S&S’s loosely defined lines of authority and possible use of ‘creative accounting’ are matters of management policy. With respect to Jason’s control procedures assignment, does he have a professional or an ethical responsibility to get involved?

how to write these three question? From which part?