This paper analyzes the internal control risks arising when a single employee — a purchasing manager for a ladies' apparel chain — holds overlapping responsibilities over ordering, receiving, and expense reimbursement. The paper identifies two primary risks: merchandise misappropriation and fraudulent expense claims. It then proposes two internal control procedures — mandatory merchandise accountability with manufacturer verification, and independent expense auditing with spending guidelines — explaining how each procedure directly mitigates the identified risks. The case illustrates classic segregation-of-duties concerns in a retail purchasing environment.
Sylvia Quinn is in charge of purchasing for a chain of ladies' apparel stores. She orders merchandise from manufacturers, submits purchase orders to the company's accounting department for payment, and receives merchandise for the company. She then allots shipments to individual stores. The company also provides her with an expense account to travel to fashion shows and to meet with designers and manufacturers. She submits requests to the accounting department for reimbursement and receives cheques for her expenses.
This concentration of responsibilities — ordering, receiving, distributing, and expense self-reporting — creates a classic internal control weakness. When a single employee controls multiple steps in a transaction cycle without independent oversight, the organization becomes vulnerable to both asset misappropriation and fraudulent reporting.
The first risk the company faces is that because Sylvia is primarily responsible for ordering merchandise from manufacturers, she could order more merchandise than is needed and divert the surplus for personal gain — keeping some for herself and her friends, or selling it to other retailers. She could conceal the unaccounted-for merchandise by claiming that the missing items were irregular, stained, or otherwise unsellable.
This type of fraud is made possible by the lack of segregation of duties: Sylvia both orders and receives the merchandise, meaning there is no independent party to verify that the quantity received matches the quantity ordered and subsequently distributed to stores. Without a check at the receiving stage, inflated orders and diverted inventory can go undetected indefinitely.
The second risk concerns the integrity of Sylvia's business expense claims. Because she submits her own expense requests and receives reimbursement with limited oversight, she has the opportunity to inflate or fabricate expenses. For example, when dining with a business contact, she could order an extra bottle of wine — not strictly necessary for entertaining — and keep it as a personal gift. She could also choose the most expensive available options for travel and dining, even when equally acceptable but more economical alternatives exist.
In a more deliberate scheme, she could travel cheaply, obtain receipts for a more expensive mode of transport, and pocket the difference. This type of expense account abuse is a well-documented form of occupational fraud and is particularly difficult to detect when a single employee controls both the submission and justification of claims without independent review.
"Controls addressing merchandise and expense fraud"
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