When examining the Financial Risk, it is essential to remember that Fraud is not the only risk in this category. Errors of all types can have serious financial problems. In the following paragraphs I will tell the story line of the unfortunate sequence of events leading to a very embarrassing outcome. The main one good thing about it had been that the financial cost was minimal. The damage towards the organization’s reputation was the real loss. I’ll explain a few of the failings and just how they could happen to be avoided, as I see things. Maybe you will think of some others. You may even observe that those same shortcomings might have left the organization vulnerable to a fraud.
It happened in the early 1970’s when many organizations were just beginning to use computers for their principal financial functions. In cases like this the part in question was creditor payments. The entire system has been reviewed such as the manual operations which linked to the computer. Like the majority of it truly does work at that time, an order input system was introduced. A repayment slip was stuck onto each invoice to be paid. A number identifying the creditor needed to be entered around the slip along with the invoice number, an expenditure code and the amount. It needed to be signed by a certified person to certify who was to be paid.
Completed invoices were bundled together into a batch which a batch header form was attached giving a batch number and also the total from the amounts to be paid, that was produced by using an adding machine. The batch ended up being passed towards the IT department where all the information around the creditor payment slips and also the batch header was input. The totals needed to agree and yet another details had to be valid. The PC then generated the entire all this data and produced the cheques and remittance advice. A completely independent group, known collectively a Dispatch, checked that the cheques agreed using the list before putting them into envelopes, and… dispatching them. Where more than one payment was being built to a creditor, the computer combined them into one cheque but showed the separate amount around the remittance advice.
A period of cheque parallel running has apparently proven that the system worked properly. The issue which defied the system concerned a credit note. The arrangement was that a credit note ought to be treated in the same way as an invoice however a negative amount shown on the creditor slip. Usually a credit the actual would be mounted on an invoice from the relevant creditor, however that was not considered significant as the computer would automatically deduct the quantity from anything being paid to that particular creditor within the same run, which often included several batches. The one thing nobody had thought of was how to deal with the problem in which a credit note experienced the system in a week when there wasn’t any invoice against which it can be offset. Inevitably, like most unforeseen circumstances, it took place due course. The PC, not able to create a cheque for any negative amount, deducted the figure in the highest number it could process. The system was designed to prevent any payment of the million pounds or even more from dealing with. In the event of an authentic million pound payment being necessary it would happen to be handled manually. Thus a cheque was produced for any million pounds less a cent less the quantity of the loan note. The loan note was for under a pound. The creditor took a photocopy from the cheque and sent it to the local paper. He framed the original. Had he tried to bank it, it’s possible it could have been queried at that stage. It’s also possible that he could have been faced with fraud, because he must have known he was not owed anything like a million pounds. The resulting furor and internal audit left a lot of blood on a lot of carpets. You might have a look at on whose it should be happened to. The programmers and systems analysts asked why they had not thought of the eventuality which did in fact occur. So was the program owner, the creditor payments manager. It should happen to be possible to request unaccompanied credit notes to become rejected. The cheque list could have been checked from the actual invoices. Someone should have noticed that the total far exceeded the batch total. Someone may have used their “common” sense and queried a repayment of nearly millions of pounds, especially because the creditor did not supply goods of anywhere near that value.
Perhaps you have to take a look at economic climates, offline and online, to be (still) fit for purpose.