Optimizing Internal Controls: Safeguarding Howard Street Jewelers

Internal controls serve as the cornerstone of financial integrity within any organization, ensuring the protection of assets and mitigating the risk of fraudulent activities. Unfortunately, the oversight of key internal control concepts by the Levis, owners of Howard Street Jewelers, allowed Betty's embezzlement to persist. This essay critically examines the lapses in internal controls, explores the role of the CPA in fraud detection, and provides comprehensive recommendations for the Trubeys to establish a robust control environment.

1. Internal Control Lapses at Howard Street Jewelers

The Levis' failure to implement effective internal controls enabled Betty's embezzlement to flourish undetected.

Firstly, the absence of segregation of duties granted Betty unchecked access to managing cash, cash receipts, and sales records. This not only presented ample opportunities for embezzlement but also facilitated the concealment of her illicit activities. Additionally, Betty's ability to put items on layaway without managerial authorization underscored a significant lapse in the crucial concept of transaction authorization. Lastly, the lack of robust physical controls, such as the failure to reconcile cash and note shortages, indicated a deficiency in monitoring and securing cash counts.

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2. The Role of the CPA in Fraud Detection

In the context of the CPA's involvement, the responsibility to address cash shortages depends on the nature of their engagement. If the CPA is solely handling tax returns without auditing the client, there is no explicit obligation to pursue the matter. However, maintaining a trusting relationship, the CPA should have communicated the observed cash shortages to the owners, fostering transparency and trust.

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In cases where the CPA is responsible for auditing financial statements, due diligence becomes paramount. Investigation and evidence gathering should occur to unearth fraud, preventing losses before reaching significant amounts, as seen in Betty's staggering $350,000 embezzlement.

3. Recommendations for the Trubeys

Establishing an organizational structure and a robust control environment is crucial for the Trubeys to enhance internal controls successfully. Core values should be clearly articulated, emphasizing ethical practices within the business. Regular training sessions can reinforce these values, fostering a culture of integrity among the staff. The key control issues facing a jewelry store—physical controls, segregation of duties, and authorizations—can be effectively addressed through the implementation of five comprehensive control activities:

Duties Sharing and Integrity Enforcement

Duties should be distributed among staff, with cashiers alternating between selling and cashiering. This ensures shared responsibilities, reducing the opportunity for theft. Even as owners, the Trubeys should welcome staff reviews, reinforcing a system of integrity.

Transaction Authorization

Any high-risk transaction should require authorization from both a sales clerk and a manager. Dual signatures on sales records and authorized returns by management contribute to a secure transactional environment.

Daily Cash Control

Implement a daily audit of the register at each employee's shift. Rewarding accuracy and addressing shortages or overages exceeding twenty dollars maintains accountability and signals the importance of precision to employees.

Deposit Reconciliation

All deposits should undergo reconciliation by a member of management, with two signatures verifying accuracy. Rigorous checks on deposit receipts, including matching figures and dates, enhance financial security.

Physical Security for Inventory

High-value inventory, especially in a jewelry store, should be securely stored with controlled access. Security measures like cameras and bi-annual physical inventory counts further protect against theft and ensure accurate records.

By implementing these five internal control activities, the Trubeys can establish a comprehensive system that not only prevents fraudulent activities but also fosters a culture of integrity and accountability within Howard Street Jewelers.

4. Strengthening the Control Environment

For the Trubeys to fortify their internal controls effectively, they need to focus on building a robust control environment. This involves setting clear expectations and creating mechanisms for monitoring and enforcement. Establishing core values is a crucial first step, but these values must be integrated into the daily operations of the business.

During employee training, the Trubeys should explicitly communicate these core values and emphasize their importance in maintaining the integrity of the business. Regular reviews and recognition of employees who exemplify these values can further reinforce the commitment to ethical practices. This creates a shared understanding among the staff that the company places a high value on ethics and integrity.

5. Conclusion

Internal controls are imperative for the financial well-being of any business. The case of Betty's embezzlement at Howard Street Jewelers underscores the significance of robust internal control systems. The Trubeys, armed with an understanding of their deficiencies, can now take proactive steps to fortify their internal controls, ensuring the long-term success and sustainability of their jewelry business. By implementing comprehensive control activities and strengthening the control environment, Howard Street Jewelers can not only prevent fraudulent activities but also foster a culture of integrity and accountability, laying the foundation for a prosperous future.

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Written by Liam Williams
Updated: Jan 18, 2024
Keep in mind: this is only a sample!
Updated: Jan 18, 2024
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Optimizing Internal Controls: Safeguarding Howard Street Jewelers. (2016, Jun 13). Retrieved from https://studymoose.com/howard-street-jewelers-case-study-essay

Optimizing Internal Controls: Safeguarding Howard Street Jewelers essay
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