Reference no: EM131989417

Problem

Tenkey Book Company operates a chain of retail bookstores throughout the United States. Sandra Hawthorn, Tenkey's controller, runs a fairly tight internal control sys-tem with rigorous requirements for the segregation of duties throughout the company. Even the best systems can have problems, and recently someone called in a tip to the company's anonymous hotline saying that Tenkey was losing a significant amount of inventory to employee theft and that the problem was pervasive through many of the company stores. The caller left no details as to who was committing the thefts or how they were being committed.

Sandra was alarmed because inventories constituted a large percentage of Tenkey's assets, and if losses could occur in even one store, they could probably occur in others too. She called a staff meeting that included the IT director and the general accounting manager. "We need a plan to investigate this," she told them. "Any suggestions?"

Tom Clockspeed, the IT director, jumped right in. "Let's do a complete inventory of all of our stores," he said.

Anna Aburida, the general accounting manager, began shaking her head. "We're not due to take inventory for another six months. It would cost us a whole lot of overtime if we do it now."

Sandra glared at Anna and said, "You're just going to have to do better than that."

"Okay," said Anna. "We need a plan. Let's start by considering likely suspects. Then we can evaluate the internal controls surrounding everyone who might be in a position to steal. There has to be a weak point somewhere."

"This is a little crazy," said Tom. "You're making all of these plans when we're not even sure if the phone caller was telling the truth. Let's at least do an inventory of one store before we do anything else."

Anna frowned. "That's great Tom. So what happens if we inventory one store and don't find any inventory shortage? Then what do we do?"

Tom slid back in his seat and laughed. "Right," he said. "But what happens next if you don't find any control problems? Then we've just wasted time. And even if you do find control problems, there's no guarantee that fixing them will fix them. And remember, we don't even know for sure if we do have a problem."

Sandra pounded her fist on the table. "This is going nowhere. I'm going to bring in a forensic accountant to find out what to do."

a. I f you are brought in as Sandra's outside forensic accountant, what advice would you give her?

b. Which employees could be stealing inventory? Describe one or two possible schemes applicable to this case.