Alchemy Case Memo Essay

3461 Words Oct 6th, 2008 14 Pages
From: The Alchemy Inc. External Audit Team
Date: September 23, 2008

Re: Internal Control Weaknesses Leave Alchemy Inc. Vulnerable to Errors, Fraud, and Abuse

Internal controls represent an organization’s processes and procedures used to meet its goals and objectives and serve as a defense in safeguarding assets and preventing and detecting errors, fraud, and abuse. Effective internal controls provide reasonable assurance that an organization’s objectives are achieved through (1) reliable financial reporting, (2) compliance with laws and regulations, and (3) effective and efficient operations. The passing of the Sarbanes-Oxley Act of 2002, as well as the numerous corporate frauds and bankruptcies over the past decade—including some
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We found that although a code of conduct, ethics hotline, and newsletter exist, none were consistently used, enforced, or reinforced by company employees or management. For example, upon joining the company, employees must sign a code of conduct; however, management has not made a sustained effort to implement or reinforce the code.

• Potential for misstatement & fraud: Compliance with the established procedures and controls were found to be ineffective. The fraud reporting process, technically put in place does not serve its intended purpose. The ineffective control environment has created an attitude and tone across the company where errors and inappropriate behavior may be seen as acceptable, thus creating opportunity for concealing fraud and potential misstatements.

• Recommendation—The team recommends that Alchemy Inc. increase awareness of the code of conduct by posting it around the facility and reinforcing it when needed, such as through periodic meetings specially designed to address this issue. In addition, the company should actively distribute the company newsletter—for example, delivering a copy to each employee personally—rather than passively leaving it out in the break room or distributing it via email. Management should also actively encourage employees to use the ethics hotline and other