To help minimize potential fraud in Southern Landscape Inc.

(SLI), comprehensive
control systems such as internal control and human resource control play a crucial role.

First of all, internal control is capable in providing the trustworthiness of financial

reporting, effectiveness and efficiency of operation, and compliance with laws and regulations
(University of California, 2008). There are five mechanisms for internal control to be functioning
effectively which consist of the control environment, risk assessment process, control activities,
information and communication system, and monitoring of controls (Whittington & Pany, 2006).

The control environment could range from setting up the management style, process, and
to regulating the entire control process (Whittington & Pany, 2006). First, SLI should validate the
existence of honesty, legal and ethical act through consistent, well-written and communicated
code of conducts. For instance, employee responsibilities and performance standards should be
clearly stated. Besides, the board of directors should conduct the employee performance
evaluations periodically (Entrepreneur, 1998). For example, John Matthews failed to conduct his
work properly caused his resignation which deemed as a punishment. Research has shown that
fear of punishment may deter fraud effectively (Albrecht & Albrecht, 2004). Also, hiring
qualified individuals and providing training can ensure the competency fulfilling their
responsibilities (Rittenberg & Schwieger, 2005). For illustration, several problems occurred in
SLI’s accounting system when John Matthews, who is believed has insufficient knowledge in
accounting, was responsible for the entire work of accounting procedures. SLI is also advised to
establish a clear organization chart by assigning authority, responsibility and accountability to
each position. Researchers have proved that fraud will be less likely to occur under a clear
conducted organizational structure (Albrecht & Albrecht, 2004)

In addition, risk assessment process has to be conducted to identify and respond to

potential risks in the company. This could be due, for example, to the possibility of producing
fraudulent report through accounting manipulation technique while top management, Stephen
Patrick has taken over the controls of the financial reporting (Understanding Internal Controls,
n.d.). Besides, SLI may as expose to greater risk of reliability in the compliance of standards after
installing a new accounting system (Whittington & Pany, 2006)

Control activities may be established by implementing performance reviews,

information processing controls, physical controls and segregation of duties (Whittington &
Pany, 2006). First, the information processing controls (IT controls) need to be performed for
verifying the accuracy, completeness and authorization of transactions (S. Anantha Sayana,
2002). It can be further divided into general controls and application controls. Under general
controls, SLI could restrain the accessibility to different users or setting up passwords by
implementing the security access and tracking system for the accounting software to prevent
fraud of modifying the software system and data. For application control, computer matching and
edit checks could be used to detect frauds and enhance reliability and accuracy (Whittington &
Pany, 2006). Secondly, physical control of assets, inventories and data files helps to minimize the
opportunity of stealing by employees or customers (Whittington & Pany, 2006). For example,
SLI should control its assets and inventories by using locks, alarm system or CCTV and spot-
checking or periodic stock-taking. To safeguard important data files or documents and records,
SLI should limit the authorization of accessing them through signature. Also, SLI should separate
the duties of recordkeeping, custody of assets, authorization of transactions and accounting
functions to minimize the fraud of employee embezzlement (Albrecht & Albrecht, 2004). Thus, it
is suggested all transactions should be processed through at least two stages (University of
California, 2008). Nevertheless, John Matthews and Randy Adams have full authority and
verification in these four major duties.

According to the information and communication systems, SLI should identify and
record all valid transactions in proper timing, classification, authorization and valuation
(Whittington & Pany, 2006). However, SLI has been proved that failing to record the
depreciation in January, misconduct the accrual basis accounting and classified some of the
transactions incorrectly.

Monitoring of performance in the course of customers’ complaints, variance reports and

periodic internal audit aids in ensuring the controls are accomplished effectively (DJS Research
Ltd, n.d.).

Other than internal control, human resource control is deemed to have critical effect to
the control system of the company. For example, job rotation can be used to minimize fraud,
through encouraging employees to take vacation in order to examine their works. Also, the salary
and incentive structure are needed to be clear in order to minimize the employees’ thought of
committing fraud (Kansas State University, 2003). SLI could establish legal relationship with its
employees by signing the employment contract and the conflict of interest policy because as a
horticulture company, employee may reveal company’s information that is essential to its
profitability, such as formula of chemical product.

Although a comprehensive control system is unable to eliminate the entirely fraud and
may increase the cost of an organization, however, it has been proved that effective control
system makes fraud more difficult to be conducted and hence minimizes the opportunity of
committing fraud (Gettler, 2006).

(830-73 in text references = 757)

References
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Western.

Rittenberg, L.E. & Scheweiger, B.J. (2005). Auditing: Concepts for a Changing Environment, 5th
Ed, Thomson/South-Western.

Whittington, O.R. & Pany, K. (n.d.). Principles of Auditing & Other Assurance Services, 15th Ed,
McGraw-Hill/Irwin.

Noordin, S. (1997). Importance of Internal Control Systems, International Journal of Government

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Gettler, L. (2006). Tighter Controls Won't End Corporate Fraud, The Age Company Ltd.
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University of California (2008) Understanding Internal control, Retrieved November 23, 2010,
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Entrepreneur (1998) Computer Fraud: Financial and Ethical implications. Retrieved November
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University of California, Segregation of Duties (Preventive & Detective) 2008, Retrieved

November 22, 2010,
http://map.ais.ucla.edu/go/1002631

Kansas State University (2003), Internal Audit - Internal Controls, Retrieved November 23,
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http://www.k-state.edu/internalaudit/intcontr.html

DJS Research Ltd (n.d.), Monitoring Performance, Retrieved November 23, 2010,
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