Case Study 19

Potential Weakness in Business Payments System

Intended audience: Professional Accountants in Business


You arrive in the office for another day’s hard work at XYZ Ltd. Since you arrived here three years ago you have found it hectic every day, but it has been fun too. You like the people you work with, and as Financial Controller you have access to what is going on across the whole business. You hadn’t worked in a construction business before, although you did the audit of one or two while training, but you feel that you have been really getting to grips with things over the last eighteen months. Even now with the year end looming and both internal and external audit visits due next week, you are upbeat.

It wasn’t always like this. For the first year or so you had thought you wouldn’t be able to cope. Your boss, Mr P – the Financial Director – has been in the business ten years and knows it inside out. While undoubtedly brilliant, he is also pedantic and inflexible. You have often wondered if his attitude comes from fear of being held to account for a mistake or whether he genuinely expects perfection 24/7. He has a harsh approach to dealing with anyone who makes a mistake, or even a commercial misjudgement. You have witnessed many tears and a good few dismissals in those three years. Your boss seems to have accepted you, however, as being someone who will maintain his standards, and life has grown more pleasant at work as a result.

You were recently able to back up your boss when he was under pressure from the board regarding the security and controls around the business’ payment systems, following an Internal Audit of this area. Your boss was particularly pleased when you refused to weaken under great pressure from the Chairman, who wanted you to admit that the measures in place were inadequate and the systems were weak. This has been on the Chairman’s agenda for many years, without any specific reason, and he makes your boss’s life miserable on the topic at least once a year. Being able to back him up so strongly has greatly improved your relationship with your boss, and even the Chairman complimented you on your performance at the meeting.

Your door opens and your cashier, Ms Q, enters along with one of the quantity surveyors, Mr R. Both are on familiar terms with you as your children attend the same school. They are clearly troubled. Ms Q explains that she has received in today’s post a cheque for S$12,500 from a plumbing contractor which regularly does work for your company. Ms Q did not understand the accompanying paperwork so she phoned her counterpart at ABC Ltd, the supplier. Ms Q was told that, while ABC Ltd was reconciling their books in preparation for their year end, they had discovered that they had been overpaid on a recent job. They had done some investigation and found that they had been paid twice for one of the stages of the work and the cheque was a repayment. You ask how this could happen, and just as importantly, how it could go undiscovered. Mr R explains that the duplicate payment was down to a simple human error on his part. He had checked and certified the work for the original stage payment, but, being under pressure had not adequately recorded the fact. When, by coincidence, a reminder had come from the supplier some 48 hours later he thought he had forgotten to make the payment, and had done the certification again. Because he had thought the payment was now overdue, he had taken it directly to his boss, the Commercial Director, and obtained his signature for an “urgent payment” – thus bypassing one of the controls. This procedure is permissible in urgent cases.

Mr R also explains that he is absolutely sure the double payment would have been picked up in the job reconciliation which is carried out when each job closes, but that it has not been done yet. As you are aware, this is not unusual as the workload has been very heavy for some months now.

Ms Q and Mr R reason that no harm has been done. The money has been refunded; the controls have not been compromised – the “urgent payment” route is, after all, an accepted variation; and the job reconciliation would have picked it up in a week or two anyway. They just wanted to be completely open and let you know, even though no damage has been done.

After they leave, you reflect. Internal Audit won’t visit this area for at least two years; the mistake wasn’t any kind of attempt to defraud; and the cash position is unaffected. This was a high profile issue with the board which would cause all sorts of damage (including to your reputation) if it were to be raised. And you can already think of an additional control which would prevent it ever occurring again. The company has not suffered any loss and this control will ensure that it never does.

What do you do now?

Analysis of Scenario: What are the readily-identifiable ethical issues for your decision?

I. For you personally

  • If you install a new control which mitigates the risk that has been exposed can you keep this matter to yourself?
  • Do you need to raise the matter with the Financial Director?
  • If you do, what happens if your boss advises you to say nothing and to merely ensure that such an occurrence does not happen again?

II. For the Company

  • Is there a supportive environment for open discussion of practical dilemmas without a recriminatory, or ‘blame’, culture?
  • Is the FD putting through these adjustments on his own behalf or is someone else exerting pressure on him to do so?

III.  Who are the key parties who can influence, or will be affected by, your decision?

‘You’; the financial director; the chairman; the other directors; the shareholders; and employees.

IV. What fundamental ethical principles for accountants are most applicable and is there an apparent conflict between them?

-          Integrity: The need to be truthful and honest. Who do you need to raise this matter with? Does the board need to know about this incident if a new control can remove the risk of it ever happening again?

-          Objectivity: Are you now too close to your Financial Director to be objective about this matter? You supported his defence of the company’s business’ payment systems.

-          Professional Behaviour: The need to consider the implications of what this incident has revealed. Do you need to raise this matter with someone else within the company and if so whom?

V. Is there any further information (including legal obligations) or discussion that might be relevant?

  • Is this an isolated incident or do such incidents occur regularly?
  • Although Mr R says that he would have discovered this double payment at a later date (bill reconciliation stage) is this the case?
  • Are job reconciliations regularly carried out as a matter of course and if not, then should they be?
  • Are your boss and the rest of the board of directors aware of this urgent payments system?
  • Is the Internal Audit department aware of this system and have they commented on it in the past?

VI. Is there a conflict between the ‘Guardian’ and ‘Commercial’ strands of an accountant’s responsibilities?


This case study was published by the Technical Policy Board of The Institute of Chartered Accountants of Scotland (ICAS), and adapted by the Institute of Singapore Chartered Accountants (ISCA) with the permission of ICAS.