Former Tyco Chief Executive Dennis Kozlowski was sentenced to 25 years in prison for stealing hundreds of millions of dollars from the company. He took advantage of the company's prosperity to help himself to massive sums of money at the expense of shareholders. Business writers referred to his spending spree as the "brazen use of a public company as his personal cash machine."
Kozlowski borrowed money from the company and then forgave the loans. He granted stock options to himself and paid himself substantial bonuses. He spent company funds to purchase and decorate several personal residences including an apartment in New York City with a $6,000 shower curtain. He purchased an art collection worth $13.1 million, donated millions of dollars of Tyco funds to charity in his name, and spent $2 million on a 40th birthday party in Italy for his wife.
a. Suggest an internal control that would have been able to prevent or detect this misstatement. Describe how the control would work and how the auditor could test it.
b. Is this type of misstatement difficult to prevent or detect by internal controls? Why? Explain your answer.