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| The Board of Directors of a Large Corporation recently learned that some members of the senior management team had circumvented the company's internal controls for personal gain. The Board appointed a special task force of external auditors and outside legal counsel to investigate the situation. After extensive review, the task force has concluded that for a period of several years the expenses of the company's chief executive officer, president, and vice president-public relations were charged to an account called the Limited Expenditure Account (LEA). The account was established five years ago and was not subject to the company's normal approval authorization process. Approximately $2,000,000 of requests for reimbursement were routinely processed and charged to LEA. Accounting personnel were advised by the controller to process such requests based on the individual approval of any of the three executives, even when the requests were not adequately documented. The vice president-public relations and his department were in charge of political fundraising activities. The task force determined, however, that only a small portion of the $1,000,000 raised last year was actually used for political purposes. In addition, departmental resources were used for personal projects of the three identified executives. The task force also uncovered an additional $4,000,000 of expenditures that were poorly documented so that even the amounts for proper business purposes could not be identified. The task force noted that these payment practices, as well as LEA, were never disclosed in the Internal Audit Department's audit reports even though company disbursements were tested annually. References to these practices and LEA were included on two occasions in recent year's work papers. The director of internal audit, who reports to the controller, advised that she reviewed these findings with the controller who, in turn, advised that he mentioned these findings to the president. The president recommended that they not be included in the internal audit reports. Furthermore, the external auditors, who reviewed the internal audit work papers, did not mention LEA or these payment practices in their recommendations for improved internal control procedures to management or in their external audit reports. The task force also noted that the company did not have a formal, published ethics policy. Questions
A. Identify at least three internal control weaknesses in the company's internal control system. |