Patrick works for McGill’s Computer Repair, owned and operated by Frank McGill.
ID: 2652112 • Letter: P
Question
Patrick works for McGill’s Computer Repair, owned and operated by Frank McGill. As a computer technician, Patrick has grown accustomed to friends and family members asking for assistance with their personal computers. In an effort to increase his income, Patrick started a personal computer repair business that he operates out of his home on a part-time basis, working evenings and weekends. Because Patrick is doing this “on the side” for friends and family, he does not want to charge as much as McGill’s charges its customers. When Frank McGill assigned Patrick the task of developing the budget for his department, Patrick increased the amount budgeted for computer parts. When the budget was approved, Patrick purchased as many parts as the budget allowed, even when they were not needed. He then took the extra parts home to use in his personal business in an effort to keep his costs down and profits up. So far, no one at McGill’s has asked about the parts expense because Patrick has not allowed the actual amount spent to exceed the budgeted amount.
1. Why would Patrick’s actions be considered fraudulent?
2. What can a company do to protect against this kind of business risk?
Explanation / Answer
Answer
1. Why would Patrick’s actions be considered fraudulent?
Patrick started a personal computer repair business that he operates out of his home on a part-time basis, working evenings and weekends along with his employment as a computer technician at McGill’s Computer Repair.
Patrick increased the amount budgeted for computer parts of McGill’s Computer Repair. When the budget was approved, Patrick purchased as many parts as the budget allowed, even when they were not needed. So he has intentionally increased unnecessary expenditure of his employer “McGill’s Computer Repair”.
He then took the extra parts home to use in his personal business in an effort to keep his costs down and profits up without taking prior permission of his employer . So He has theft computer parts.
So Patrick has intentionally increased unnecessary expenditure of “McGill’s Computer Repair” and intentionally theft computer parts for benefit of his personal business at cost of his employer “McGill’s Computer Repair”. So Intention of Patrick was not good. So Patrick’s actions would be considered fraudulent.
2. What can a company do to protect against this kind of business risk?
Company should establish proper internal control system where work done by one person should be checked by another person and single person should not be allowed carry whole transaction process. Here Computer repairer of computer department should not be allowed to prepare budget for computer parts. This duty should be segregated with finance department.
Company should demand justification for every abnormal deviation of budgeted amount for getting approved compared to last budgeted amount.
Company should establish pre approval mechanism for every expenditure tobe incurred within company to verify whether is it justified and in line with business needs to keep control over unnecessary expenditure.
Company should do internal audit and stock audit of computer parts at regular interval.
Company must implement human resource policy for employees regarding scope of outside business/employment by them along with company’s employment and full disclosure regarding such outside business/employment by employees to company.
Company should establish Whistle blower mechanism to prevent frauds within company. Company should encourage ethical behaviour of employees within company.