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Case Study: How a CFO plowed himself under Essay

The three critical elements of the fraud triangle: 1) motive, 2) opportunity, and 3) Rationalization, clearly exist within the case of the $150,000 embezzlement involving McKinley, his tractor company, and CFO position with the bank.

McKinley’s motive, the driving force behind this act of embezzlement was his own self pride: his inability to deal with the fact that he had made a bad choice of investment, a poor investment strategy and an inability to manage and operate a small business. He was a well-educated, well respected, high ranking financial professional with a major financial institution, and he had failed.

The opportunity to create this fraud and embezzlement was the result of his own knowledge and understanding of bank operations. Since he was the person that designed the systems, implemented the systems and over saw the systems, he as in the perfect position to take full advantage of the systems. He did exactly that, he used his knowledge and understanding of the banking systems to take full, illegal advantage of the bank.

McKinley rationalized his plan as being the perfect scheme to take money from the bank due to the fact that the risk of being caught or detected was impossible – he could request money, authorize the transfer, approve and write the amounts off – with no other approval or authority. High volume accounts, high dollar amounts through the clearing accounts, insignificant dollars to the bank, no one would know better, he would never get caught, hardly even a wrong doing – this was his rationalization.

The banks systems of internal controls were weak and insufficient to detect this low level of fraud and embezzlement. Given an extremely liquid asset of this nature, cash – every journal entry through a clearing account should require a minimum of two signatures. In addition, a senior level manager should never have sole authority to complete all sides of any transaction. In this case he was able to create the balance sheet only entry involving the clearing account and the transfer to a customer cash account – to get the cash outside the bank ledgers. Secondly he was able to clear the bank side, clearing account, with a write off to a “soft” expense account, with minimal impact on the overall operations of the bank and little risk of being identified through normal financial reviews.

The dual approval signature, creator and approver of the journal entry were the first step that should have prevented the fraud. The second opportunity to detect this fraud, and this is where the external auditor should have detected the fraud, is that every balance sheet account should have a detailed, audited and reviewed accountant analysis associated with the account.

The account analysis consists of a full listing of each and every amount processed through the account and a detailed listing of each amount open and outstanding in the account balance at the end of each period. To the point that no account has a detailed account analysis is a breakdown in the financial controls of the business. The external auditors should require a complete analysis of each account on a monthly basis, to the extent such detail does not exit; the auditors should create such detail. So yes, as part of the normal review of balance sheet accounts, the external auditors should have challenged the fact that no account details, listings or support was available to document the account balance at the close of business.

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