BKAL 3063 INTEGRATED CASE STUDY

CASE 1 – INDIVIDUAL ASSIGNMENT

Norfatiha Binti Mohd Asri (237947) (Group A2)

ANSWER:

(a) FIVE (5) red flags that indicate the possible incidence of fraud at Leeds Medical Center
(LMC):

i. Linda known as “Larson La Frugalist” suddenly start a lavish lifestyle with a great
desire for expensive jewelries, designer clothes, elaborate homes, and luxury cars and
now called as “Luxury Queen”.

ii. Linda processed more that 60% of the referral bonuses out of 800.

iii. Some of referral bonuses payment were proceed by Linda without authorization and
signature from Debby.

iv. Payments to the referring employees were processed even though the new employees
did not completed their There were ten instances where the newly hired employees
failed to complete the probationary period and.

v. There are major deficiencies in the office of internal audit of LMC.

(b) Identify and explain Linda’s motivation for committing fraud based on fraud triangle
theory:

Fraud commits by people not happen randomly. The fraud was led by some factor.
Research on fraud identifies three key condition that exist before a fraud occurs which are
pressure, opportunity and rationalization.

In Linda’s case, the pressure came during the early of her marriage where she is having
financial pressure. Also, she needs to change her frugal lifestyle to luxury lifestyle because her
husband with her frugal lifestyle and might leave her if she did not change to her husband’s
favor.

Second, the opportunity exist because the lack of internal control in LMC. With the poor
internal control, Linda can commits the fraud without worries since she thinks the fraud will
not be detected by anyone. Also, without strength internal control, she can do any task which
is not even under her responsible such as proceed the payment of bonuses without Debby’s
authorization.

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Third, the rationalization of Linda’s is she believe she entitled and have right to the
additional benefit. She also believes she can do the fraud since her employer overlooked on
her promotion and also not giving her raise in pay for years.

(c) Identify and analyze ONE (1) key issue at Leeds Medical Center (LMC). Identify FIVE
(5) alternative solutions to the issue identified.

 One key issue at LMC is fraud happen in the ERBP

Fraud issue in LMC were mostly conduct by Linda, the administrative assistant in
the human resources department. The ERBP is the program where employee of
LMC will be given bonus after success recruiting new employees to apply job at
LMC. In ERBP, most of the referral submission was processed by Linda. Linda
also proceed to payment process without the authorization from Debby. Also,
engagement team uncover that 10 of the referral bonuses were paid to the referring
employees even though the newly hired employees did not complete the trial period
at LMC.

 5 alternative solutions

i. Strengthen the internal control

ii. Ensure each transaction has been authorized by the right person before forward
to payment process

iii. Ensure that the bonuses were paid after the newly hired employees complete
their trial period

iv. Reorganize and improve the ERBP especially on procedures and processes

v. Create awareness campaign about the bad implication of fraud to organization

as well as employees.

(d) Provide TWO (2) recommendations that you as an accounting consultant would propose
to the management of Leeds Medical Center whether they should hire Nick.

i. Perform review of prior audit by Nick

Since Nick have the expertise as well as experience in audit works for many years,
LMC cannot afford not to hire him as their internal audit member. So, to confirm that

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Nick is really capable in performing the audit works, a review of prior audit works by
audit must be conducted.

ii. Do not hire Nick due to familiarity issue

Nick was a part of the engagement team of LMC when working at Talbot &
Associates for seven years. So, familiarity issue exist because he has a particular and
confidential information about LMC, knowledge of the audit firm and familiarity with
the audit approach and testing strategy. If LMC hiring Nick, his rational decisions
might be influence by this factor.

(e) In your opinion, discuss whether Debby should be terminated or not.

In my opinion, Debby should be terminated. The fraud committed by Linda might not
happen if she put more effort on supervising and check Linda’s works. Also, I think Debby
was putting too much trust on Linda since she is her sister in law. So, to avoid this, Debby
should inform the management about the relationship with Linda. By doing that, the
management will aware and can take any appropriate action.

(f) Discuss THREE (3) ethical values violated at Leeds Medical Center (LMC).

Integrity. Integrity value was violated by Linda and Debby. This is because they did not
disclose about their in law relationship. They should be honest about this since their work
might be affected by this relationship where can bring problems such as fraud.

Objectivity. Objectivity value violated can also be seen in the relationship between Linda and
Debby. The question can be asked whether they can really work with manner and not
influenced by their relationship.

Professional behaviour. All problem arise in LMC will cause their reputation to fall. For
example, they do not want to put more investment in improving internal control. This
behaviour can cause problems to their organization at once will affect their reputation.

(g) Explain THREE (3) key takeaways from this case.

First, organization must be not reluctant to spend more on improving their internal control.
Internal control is very important in every organization because they can reduce the any kind

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of risk such as fraud, help to ensure that information is complete and accurate and also ensure
organization complies with laws and regulations.

Second, organization must have strength monitoring on any program they develop. They
must ensure that the program is running with right procedures and guidelines. Also, they need
to ensure no people can take manipulate the program for their own benefit. If they found any
problems, reorganization are necessarily to do to ensure the program on the correct path.

Third, management need to always check their employee’s background. If possible,

organization must avoid to put employees who have family relationship under same
department. The employees who have close relationship might putting too much trust against
each other which can affect their works and also rationalization.

(h) Assumed that you are Nick Cooper, provide your view in detail with the approach to
focus on safeguarding the fundamental principles of integrity, objectivity, professional
competence and due care, confidentiality and professional behavior

Integrity. A professional must be straightforward and honest in all professional and business
relationships. To safeguarding this principle, all matter that will affect organization must be
disclosed and honest. And if professional found any misleading, incorrect information
reported, they shall take steps to be disassociated from that information.

Objectivity. A professional must not compromise their professional or business judgment

because of bias, conflict of interest or the undue influence of others. To safeguarding this
principle, professional must disclosed about the matter where objectivity exist and if possible
avoid any professional activity or services.

Professional competence and due care. To safeguarding this principle, professional must
maintain professional knowledge and skill at the level required and also act diligently in
accordance with applicable technical and professional standards when performing their task to
provide competent professional service.

Confidentiality. To safeguarding this principle, professional must not disclosed any

confidential information acquired without proper and specific authority and must not use it to
their personal advantage or the advantage of third parties.

Professional behavior. To safeguarding this principle, professional must comply with relevant
laws and regulations and avoid any conduct that the professional knows or should know may
discredit the profession.