Accounting Ethics Essay Example
Accounting Ethics Essay Example

Accounting Ethics Essay Example

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  • Pages: 5 (1156 words)
  • Published: January 15, 2017
  • Type: Essay
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An all-encompassing internal control system involves explaining and describing how it reduces the risk of fraud, safeguards assets, encourages employee compliance with company policies, enhances operational efficiency, maintains precise accounting records, and ensures legal compliance. Alongside preventing fraud, internal controls also tackle waste and inefficiency. These controls are classified into five components that aid in analyzing the internal control system.

The first element in the text is the control environment, which includes managers and CEO's of companies. They play a crucial role in setting good examples and establishing a corporate code of ethics, especially for larger companies. The second element is risk assessment, where organizations identify potential risks and take measures to prevent financial harm to the company, its workers, owners, and creditors. Lastly, an information system is discussed


wherein accounting records are maintained accurately and in a timely manner.

The fourth aspect is the control procedure, which considers the separation of duties as a means to prevent theft. Additionally, the monitoring of controls ensures that no individual or specific group can carry out transactions without being verified by others. Separation of duties is commonly referred to as the foundation of internal control for protecting assets. If one person has both custody and accounting responsibilities for an asset, there can be potential consequences.

Separation of duties is often considered crucial for internal control to safeguard assets. When one person or a small group has complete control over transactions from start to finish, they can manipulate records and embezzle from the organization. For example, if an individual handles collecting and accounting for checks in an online DVD business, they can mar

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the account as paid and deposit the check into their own account. Simultaneously, they can use the lapping method to conceal the shortfall by depositing collections later received from another customer, creating the illusion that the money has been properly accounted for and deposited in the bank. This highlights the potential risk of granting individuals excessive control over financial responsibilities.

Gretchen Rourke, an accountant at Dublin Limited, has found errors made by her supervisor Billy Dunn. These errors have led to a 25% overstatement of the company's net income. It is unclear if these mistakes were deliberate or accidental. Consequently, Rourke is uncertain about what steps to take next.

To address Dunn's mistakes, Rourke should calmly communicate with them and work together to rectify the errors. If necessary, they should also inform the controller of the identified mistakes. However, if Dunn is unwilling or unable to correct the errors, Rourke should promptly escalate the issue to their superior. This action is not only ethically right but also crucial due to a 25% overstatement of inaccurate information in the accounting records. Unfortunately, if Rourke holds a high position like CEO or head of the company, it puts them in a difficult situation. In such cases, resigning or reporting the matter to appropriate authorities may be considered as the most suitable course of action.

Bobby Flynn, the executive director of Downtown Kalamazoo, a revitalization organization in Kalamazoo, Michigan, engaged in fraudulent activities by embezzling $333,000 over a span of 13 years. His methods included depositing cash receipts from subscribers into his personal bank account, writing self-issued checks using Downtown Kalamazoo's funds, and creating fictitious

entities to receive checks from the organization.

The board of directors, consisting of civic leaders, was tasked with leading Downtown Kalamazoo. Unfortunately, Flynn's embezzlement went undetected until the organization faced financial challenges. Listed below are four preventative measures that could have been employed to avert Flynn's embezzlement.

In order to avoid embezzlements, like the one committed by Flynn and others in different organizations, it is important to incorporate intelligent hiring methods and set up a division of responsibilities. It is advised that no person or team should possess complete authority over transactions, and conducting background checks during the recruitment process for roles that provide chances for fraudulent activities is vital.

Monitoring and comparing are crucial aspects as they compel individuals or teams to verify their records, plan their activities, and enable organizational auditing. Having comprehensive accounting records is equally essential as they can be supplemented by electronic or hard copies, ensuring a comprehensive overview of all the organization's processes for quick and efficient checks.

Having limited access to records and assets can significantly hinder dishonest acts within an organization. If the accounting department is unable to access the actual money and those responsible for handling the money cannot access the organization's accounting records, except to provide necessary information to verify payment receipts, it becomes extremely difficult for an individual to commit fraud without collaborating with others in different departments. Alternatively, implementing a thorough approval system within the organization, wherein managers must authorize certain actions before they are carried out, can also prevent fraudulent activities.

McCall stores evaluate internal control over cash receipts by utilizing point-of-sale terminals as cash registers. These

registers exhibit the sale amount, cash received, and change given to customers. While the machine generates customer receipts, no transaction records are maintained. At the end of each day, the clerk counts the register's cash and hands it to the cashier for deposit into the company bank account.

In order to persuade the store manager about the internal control weakness related to cash receipts, it is essential to pinpoint the specific weakness that allows employees to steal cash and propose measures for prevention. The primary flaw is the lack of a transaction tracking system, which enables clerks to pocket money without any record except for customer receipts.

A customer purchasing a $10 item could receive the receipt while the transaction goes unrecorded, allowing the possibility of the money being pocketed. To address this issue, it is necessary to implement a system that logs the number of daily transactions, including the sale amount and details of each item sold. Furthermore, a separate inventory system should be established that only managers can modify, ensuring that clerks cannot make unauthorized changes.

In this text, the author discusses learning about fraud and identifying internal control weakness. The examples given include an auditor discovering an internal control weakness in Framingham Manufacturing's cash payments, where the purchasing agent has sole responsibility for purchasing diamonds, approving invoices, and signing checks without any supervisor review. Another example involves Leslie Joyce, who owns an architectural firm and manages the office while also traveling to meet clients.

Joyce has noticed that architectural jobs in the office have not been progressing well when she returns from business trips. She discovers that two

senior architects, who are supposed to be responsible for office management, neglect their regular tasks when she is away. Only one employee is needed to manage the office. Meanwhile, c.J.T. Durfee has been working for the City of Maron for a long time and handles various duties including accounting, opening mail, preparing bank deposits, and reconciling bank statements due to the small size of the city.

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