In the early 20th century, there was an ambitious young man named Arthur who started working at a company in Chicago as a mailroom clerk. He was a hard worker and very smart, eventually ending up as the president of the company, the James H. Rhodes Company. The firm produced steel wool and harvested sea sponges in Tarpon Springs, Florida for household and industrial use. The company was very successful, and Arthur decided that the best way to ensure the continued success of the company was to hire trusted family members for key management positions—because you can always count on your family. Arthur decided to hire his brother Benny to be his Chief Financial
Officer (CFO) and placed other members of the family in key management positions. He also started his eldest son, Arthur Junior (an accountant by training) in a management training program, hoping that he would eventually succeed him as president.
As the company moved into the 1920s, Benny was a model employee; he worked long hours, never took vacations, and made sure that he personally managed all aspects of the cash function. For example, he handled the entire purchasing process—from issuing purchase orders through the disbursement of cash to pay bills. He also handled the cash side of the revenue process by collecting cash payments, preparing the daily bank deposits, and reconciling the monthly bank statement.
Requirements
1. Identify the control weaknesses in the revenue and purchasing processes.
2. Identify any general controls Arthur should have implemented to help protect the company.
3. From Chapter 11, identify the internal control activities that Arthur should have considered (or implemented) that would have thwarted Benny’s bad behavior.