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Case No
Case No. 1 Bern Fly Rod Company is a small manufacturer of high-quality graphite fly-fishing rods. It sells its products to fly-fishing shops throughout the United States and Canada. Bern began as a small company with four salespeople, all family members of the owner. Due to the high popularity and recent growth of fly-fishing, Bern now employs a sales force of 16, and for the first time employs nonfamily members. The salespeople travel around the country giving fly- casting demos of their new models. Once the sales orders are generated, inventory availability is determined and, if necessary, the salesperson sends the order directly to the manufacturing department for immediate production Sales staff compensation is tied directly to their sales figures. Bern's financial statements for the December year-end reflect unprecedented sales. 35 percent higher than last year. Further, sales for December account for 40 percent of all sales. Last year, December sales accounted for only 20 percent of all sales. Required: Analyze the previous situation and assess any potential internal control issues and exposures. Discuss some preventive measures this firm may wish to implement.
Expert Solution
The potential control issues and Exposures in the Bern Fly Rod Company are as follows:
- There is a possibility that the sales people might falsely record a sale as they are paid upfront for taking orders from customers and the products are shipped later.
- The sales people may also provide false details about the travel expenses and take the money as the expenses are submitted to a cash disbursement clerk who directly issues them a check for the same.
- A potential exposure is that new sales people may be entitled to write up non valid sales orders in order to increase their year-end compensation. This would be a problem if the sales people do not intend to remain with Bern for the entire year.
Preventive measures which Bern must implement to prevent any type of fraud are the following:
- Bern must verify whether the customers are showing interest in the purchase of the fly-fishing rods.
- Sales people compensation should be tied to orders shipped and not just sales orders generated.
- A detective control must be ensured to verify large orders placed with the customers through a confirmation process prior to manufacturing and shipping the products.
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