Question

BACKGROUND

A longtime client, Paris Clinton, recently entered into a new venture involving his ownership and operation of a small 18-room motel and restaurant located in an area of central Pennsylvania heavily visited by tourists. He needs your advice.

Paris hired a young couple to run the motel and café on a day-to-day basis and plans to pay them a monthly salary. They will live for free in a small apartment behind the motel office and will be in charge of the daily operations of the motel and café. The couple will also be responsible for hiring and supervising the four or five part-time personnel who will help with cleaning the rooms, cooking, and waiting on customers in the café, etc. The couple will also maintain records of rooms rented, meals served, and payments received (which can be in cash, checks, or credit cards). They will make weekly deposits of the business's proceeds at the local bank.

            As the time approaches for the business to open, Paris is concerned that he will have little control over the operations or records relating to the café, given that day-to-day control is fully in the hands of the couple. He lives more than five hours away, in Philadelphia, and will only be able to visit periodically. The distance is beginning to make Bobby a bit nervous. He trusts the couple he has hired, but he has been around long enough to know that placing employees in situations where they might be tempted to do wrong is unwise.

Paris needs your help in identifying possible ways his motel and café could be defrauded. He especially wants your assistance in identifying creative internal controls to help prevent or detect fraud.

REQUIREMENTS

l. What are your two biggest concerns relating to possible fraud on the part of the couple for the motel business? For each concern, generate two or three controls that could effectively reduce risk related to your concerns. Use common sense and be creative!

2. Are your two biggest concerns relating to possible fraud for the café business? For each concern, generate two or three controls that could effectively reduce risk related to your concerns.

3. Describe the impact each proposed control would have on the efficiency of running the business. Are the controls you generated both effective and efficient?

4. Describe the potential impact of your controls on the morale of the couple in charge of the day-to-day operations. How could Bobby deal with your concerns?

Answer 1

Two major concerns are:

• Skimming, which occurs when employees take money from receipts and don’t record the revenue on the books.
• Embezzlement, also called larceny, which is the illegal use of funds by a person who controls those funds. For example, a bookkeeper may use company money for his own personal needs.

Internal control to prevent the abovementioned issues are:

1. Segregation of Financial Duties
2. Surprise visit and checks
3. Daily submission of cash in the Bank
4. Camera at the reception
5. Posting to accounts receivable and receiving cash receipts should also be segregated.

Yes, the controls are effective and efficient and they will not impact the business in negative way.

Potential Impact:

1. Trust Issues : The couple might think that the owner does not trust them. But, the Bobby can handle the situation by making them realize that he trust them and it is for the mutual benefit.