Assignment
CASE: Red Bluff Inn & Café
Establishing Effective Internal Control in a Small Business by MARK S. BEASLEY, FRANK A. BUCKLESS, STEVEN M. GLOVER and DOUGLAS F. PRAWITT.
LEARNING OBJECTIVES
After completing and discussing this case you should be able to
[1] Assess how the absence of effective internal controls in a small business operation increases the likelihood of fraud
[2] Use common sense and creativity to generate internal control suggestions that will effectively and efficiently reduce the potential for fraud
BACKGROUND
An entrepreneur by the name of Francisco Fernandez recently entered into a new venture involving ownership and operation of a small, 26-room motel and café. The motel is located in a remote area of southern Utah. The area is popular for tourists, who come to hike and mountain bike through the area's unique red rock terrain. Francisco has hired you to provide advice.
Francisco hired a young couple to run the motel and café on a day-to-day basis and plans to pay them a monthly salary. They will live for free in a small apartment behind the motel office. The couple will also be responsible for hiring and supervising the four or five part-time personnel who will help with cleaning the rooms, cooking, and waiting on customers in the café, etc. The couple will maintain records of rooms rented, meals served, and payments received (whether by cash, check, or credit card). They will make weekly deposits of the business's proceeds at the local bank.
As the time approaches for the business to open, Francisco is concerned that he will have little control over the operations or records relating to the motel and café, given that the day-to-day control is fully in the hands of the couple. He lives almost five hours away, in northern Utah, and will only be able to visit periodically. The distance is beginning to make Francisco a bit nervous. He trusts the couple he has hired, but has been around long enough to know that it is unwise to place employees in situations where they might be tempted.
Francisco needs your help to identify possible ways his motel and café could be defrauded. He especially wants your assistance to devise creative internal controls to help prevent or detect fraud.
REQUIRED
The case was prepared by Mark S. Beasley, Ph.D. and Frank A. Buckless, Ph.D. of North Carolina State University and Steven M. Glover, Ph.D. and Douglas F. Prawitt, Ph.D. of Brigham Young University, as a basis for class discussion. Red Bluff is a fictitious company. All characters and names represented are fictitious; any similarity to existing companies or persons is purely coincidental.
[1] What are your two biggest concerns relating to possible fraud for the café part of the business? For each concern, generate two or three controls that could effectively reduce risk related to your concerns. Use common sense and be creative!
[2] What are your two biggest concerns relating to possible fraud for the motel part of the business? For each concern, generate two or three controls that could effectively reduce risk related to your concerns. Use common sense and be creative!
[3] Describe the potential impact of your proposed controls on the morale of the couple in charge of the day-to-day operations. How might Francisco deal with these concerns?
[4] Briefly describe the impact each proposed control would have on the efficiency of running the business. Are the controls you generated both effective and efficient?