Claiming Your Place at the Boardroom Table: The Essential Handbook for Excellence in Governance and Effective Directorship by Thomas Bakewell & James J. Darazsdi

Author:Thomas Bakewell & James J. Darazsdi [Bakewell, Thomas & Darazsdi, James J.]
Language: eng
Format: epub
Tags: Business & Economics, General
ISBN: 9780071833592
Google: lImMBAAAQBAJ
Publisher: McGraw Hill Professional
Published: 2014-09-26T00:32:50.103550+00:00

FIGURE 4.3 Total Restatement by Large U.S. Companies

Examples of the Failure of Internal Controls

As a wrap to our section on internal controls, let’s look at two recent situations that highlight the failure of internal controls. Both led to major financial losses.

The basic risk of fraud is always present. In 1973 Dr. Donald Cressey created a fraud triangle to explain how a normally trustworthy employee steals (see Figure 4.4).2

FIGURE 4.4 The Fraud Triangle

Rita Crundwell served as chief financial officer (CFO) for the city of Dixon, Illinois, for decades. She made a modest salary managing an annual city budget in the $8 to $10-million range. Crundwell also lived large as one of the top owners of champion horses in the luxury world of quarter horses. In April 2012, Crundwell was fired for alleged embezzlement of some $30 million from city coffers.3 In 2013, Crundwell was sentenced to 235 months in prison for stealing almost $54 million.4 Subsequent settlements were made with Dixon’s external auditor for some $35 million, with Dixon’s internal auditor for $1 million, and with a bank for almost $4 million.5 At least part of the damage may have been caused by a major internal control failure. Crundwell had created huge capital construction accounts to cover the missing funds for major projects that were never approved and never existed. The auditors apparently never checked to see if these major projects existed. They didn’t exist. A fairly standard audit test is to visit job sites and look at physical assets like buildings under construction or recently completed. Other shortcomings were alleged in the audits as well.

MF Global Holdings Ltd. was a large commodity futures broker headed by CEO Jon S. Corzine, a former New Jersey governor. MF Global collapsed and filed for bankruptcy protection in October 2011.6 The U.S. Commodity Futures Trading Commission (CFTC) filed a suit accusing Corzine and assistant treasurer Edith O’Brien of illegally transferring money out of customer accounts to stem losses from other trading by the company.7 At the time, federal laws required futures brokers to keep customer funds separate and barred them from using funds elsewhere. Shareholders also accused PricewaterhouseCoopers (PwC) of professional negligence, although the court eventually dismissed all claims against PwC.8 Strong internal controls at the company would be the best tool to prevent any alleged transfer of money out of customer accounts for other purposes.

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.