Accounting-This is an auditing assignment.

2015 STUDENT C ASE C OMPETITIONThe Student Case Competition is sponsored annually by IMA® to providean opportunity for students to interpret, analyze, evaluate, synthesize, andcommunicate a solution to a management accounting problem.OUT OF CONTROL:Lax Procedures atNational Capital Trust?By Ron Messer, CA, CMA (Canada)s manager of the Finance department for NationalCapital Trust, Miriam Richardson was in charge offinancial functions at the institution. It was her jobto ensure that clients’ funds were managed properly. InAugust 2013, Miriam noticed several unexplainedchanges in various accounts, including some accountsthat were worth millions of dollars. Small sums of moneywere being withdrawn frequently, and large undocumentedcredit card purchases were being made. The Legal Services department also reported that an unusually largenumber of amendments were being made to client wills.With all this going on, Miriam was concerned about thesafety of the customers’ assets.ABackgroundNational Capital Trust (NCT) was formed in the 1970s toprovide trustee services for elderly clients. Even as it grewand subsequently offered additional services to its customers, NCT remained first and foremost a trust company. As its aging client base grew, more assets were beingplaced in the hands of NCT’s professional staff. As atrustee, the company provided security for money held inits accounts, items in safety deposit boxes (such as jewelry),investment portfolios, and real estate assets. To do this,NCT was assigned power of attorney (POA) over theclient’s assets through a document completed by theclient or a family member. Clients’ bills were paid withfunds held in the trust, and their assets were managed sothat they could maintain a comfortable lifestyle.Miriam was concerned that financial safeguards hadnot kept pace with the rapid growth in NCT’s assets.Fraud was always a possibility when dealing with assetsheld in trust. In fact, the company’s external auditors andregulatory authorities had identified weaknesses in theinternal controls on several occasions. Unfortunately, veryfew of these issues were addressed. As one senior managersaid, “We trust our employees.” In addition, Miriam’sdepartment was constantly backlogged with work, andthe shortage of workers with the necessary skills made itdifficult to find qualified candidates to hire.August 2014IS T R AT E G I C F I N A N C E712015 STUDENT C ASE COMPETITIONBusiness ProcessTransaction ControlsNCT has four client-facing departments: Client Services,Finance, Investments, and Legal Services (see Figure 1).The processes at the company relating to trust accountsinvolve client enrollment, administration procedures, andtransaction controls. Figure 2 provides an overview of theprocesses relating to client accounts, while Figures 3 and 4contain a sample of job descriptions and NCT policiesand procedures.Prior to a payment being made, a pre-audit is done onthe disbursement to ensure that (1) it relates to the correct client, (2) the funds are taken from the right account,(3) the necessary approvals have been obtained, and(4) appropriate supporting documentation is provided.Payments can be made by way of petty cash, check, or byusing a client’s credit card. Payments are authorized bythe case worker and approved by the financial representative. The Finance department requires supporting documentation for the disbursement, but it isn’t alwaysprovided. Case workers can make small payments usingpetty cash, which is taken directly from the client’s bankaccount. Because of the small dollar value of these disbursements, supporting documentation usually isn’t provided to the financial representative who approves thetransactions.The Finance department receives cash from clientinvestments (such as dividend checks, interest on bonds,and certificates of deposit, as well as rent from real estateholdings). Incoming mail is opened by the client’s financial representative. Any cash or checks received aredeposited into the appropriate account by the financialrepresentative and recorded by both the Investmentsdepartment and the Finance department. NCT’s auditorshad noted that a bank reconciliation of the cash receivedand cash deposited was required but not always completedon a timely basis.Client EnrollmentFor an individual to enroll with NCT, an applicationform needs to be completed in the Client Servicesdepartment. This typically is done by a family memberof the elderly customer. The customer’s assets are catalogued by a representative of NCT who goes to the individual’s home to take an inventory of valuables. In thepast, two individuals usually went and cataloguedeverything, but staff shortages resulted in only onebank representative now being sent. Assets that get catalogued could include jewelry, collectibles, and—notuncommonly—loose cash. The assets are then placed ina secure location at NCT (or sometimes offsite), and aPOA is assigned to the trustee to make prudent financialdecisions on the client’s behalf. Assets are held in trustuntil the client dies. At that time, they are distributedbased on the terms of the will. The Legal Servicesdepartment coordinates client POA documents andwills.New HireAdministration ProceduresNCT assigns a case worker from its Client Servicesdepartment to each new customer. It’s the case worker’sjob to contact clients periodically to ensure their wellbeing. For example, if the individual is in a care facility,the case worker ensures the person is properly fed,clothed, and bathed.A financial representative in the Finance departmentworks with the case worker to ensure that all financialissues, such as paying bills and making small purchases(e.g., a television for personal use), are handled properly.It’s the job of the financial representative to ensure thepropriety of any payments made, including providingappropriate supporting documentation for any disbursements. In most cases, family members aren’t interested incaring for their elderly parents. As a result, the case workerbecomes the main personal contact for many clients, andclose ties frequently develop between client and caseworker.72S T R AT E G I C F I N A N C EIAugust 2014A new case worker was hired in January 2013 to alleviatestaff shortages and deal with the large backlog of work,particularly in client enrollment. She seemed to be theideal candidate. She had relevant work experience, properacademic qualifications, and had performed well on aptitude tests. In addition, phone calls placed to her references resulted in glowing reports.NCT’s Human Resources (HR) department was taskedwith verifying the candidate’s credentials. Unknown to theHR person checking her qualifications, the person whoprovided confirmation of the candidate’s prior work experience also served as a reference and was a close personalfriend of the applicant. Also unknown by HR was the factthat her qualifications came from an obscure collegelocated outside the country. A photocopy of her degreehad been accepted as evidence of education. These vettingprocedures weren’t normal practice for HR, but thedepartment was short-staffed and busy trying to fillnumerous positions. The urgency to fill the case workerFigure 1: National Capital Trust Organization StructureNATIONAL CAPITAL TRUSTCLIENT SERVICESINVESTMENTSLEGAL SERVICESDEPARTMENTDEPARTMENT• Cash payments• Set up client accounts(Manager:Miriam Richardson)• Manage client accounts• Power of AttorneydocumentsFINANCE DEPARTMENTDEPARTMENT• Cash receipts• Enrollment application• Manage client affairs• WillsFigure 2: Processes for Client AccountsCASH RECEIPTSCASH PAYMENTSNATIONAL CAPITAL TRUST:CLIENT SERVICES DEPARTMENT:Mail room receives dividend checks, interest payments,Case worker inititates payment requestand rents for client(for utility bills, rent, etc.)FINANCE DEPARTMENT:FINANCE DEPARTMENT:• Records information• Reviews cash payment request and determines• Deposits funds in client accountsappropriate payment method:• Monthly bank reconciliations—petty cash used for small items—checks/credit card used for otherpayments• Client accounts updated for payments made• Monthly bank reconciliations completedINVESTMENTS DEPARTMENT:• Maintains accounts• Manages client investmentsCHANGES TO WILLSUpdated wills and POAs sent by case worker toLEGAL SERVICES DEPARTMENT:• Reviews documentation• Records changes and files latest amendments• Sends copy of new will to Finance departmentAugust 2014IS T R AT E G I C F I N A N C E732015 STUDENT C ASE COMPETITIONFigure 3: Manager Job Descriptions(excerpts)Figure 4: NCT Policies and Procedures (excerpts)Petty CashManager of Client ServicesPetty cash funds are to be used for purchases costing $50 orKey responsibilities include:less, chargeable to a client account. All such purchases must beN Processing intake forms for new clientssupported by a paid invoice or a receipt. A petty cash fund is anN Custody, recording, and safeguarding ofimprest fund. This means that the fund is always at the sameclient assets (jewelry, collectibles, etc.)value. At all times, the cash on hand, plus vouchers or invoicesN Coordination of case workers and clientsrepresenting amounts paid from petty cash, plus the amountsN Hiring/training of new case workersawaiting reimbursement, must equal the value of the fund. Thepetty cash fund is subject to audit on a periodic basis.Manager of FinanceKey responsibilities include:N Security over cash receipts and paymentsmade on behalf of clientsN Pre-audit of client payments beforedisbursementPayments on Behalf of ClientReceipts provide documentation for purchases made by checkor credit card. The overriding expectation is that receipts orpaid invoices are to be submitted as documentation for thesepurchases.N Maintaining accurate and complete clientfinancial records and bank accountsN Managing client petty cash fundsReceipt and Safeguarding of CashThe mail room will forward all client correspondence to theFinance department, where the financial representative respon-Manager of Investmentssible for a client will open the mail. Cash received must not beKey responsibilities include:left unattended during the day. Funds should be storedN Safeguarding client investments (securities,real estate, etc.)N Ensuring appropriate returns on client assets,in compliance with investment policiesovernight (or during the day when unattended) in a cashboxwithin a locked cabinet or safe to which there is restrictedaccess. Ideally, one person should be held responsible for thesafekeeping of funds. Deposits of funds are to be done daily.N Preparing quarterly client investmentClient Bank AccountsstatementsN Liaising with the Finance departmentBank reconciliations should be completed on a timely basis(monthly) for all client accounts and should be reviewed andManager of Legal Servicesapproved by a supervisor.Key responsibilities include:N Representing clients in court proceedings(e.g., will variation disputes)N Processing files and maintaining security overall legal documentsN Managing/reviewing client POAs and willsand ensuring they are current and authorizedSigning AuthoritiesAll client funds must be administered through the client bankaccount(s) maintained by the Finance department. The following persons are authorized to sign all checks on all bankaccounts for their clients: (1) financial representative or(2) case worker.N Acting as executor for deceased clientsSecurity of Credit Card InformationNational Capital Trust is bound by contract and by law to keepconfidential any credit card information received from clients orany other party. All copies of credit card receipts should be sentwith cash transmittals or tallies to the Finance department,which then stores these documents in a secure location untilthe documents can be destroyed.74S T R AT E G I C F I N A N C EIAugust 2014position and time constraints led to the relaxed standards.Figure 5: NCT Corporate Governance(excerpts)The Board of Directors will be composed of12 members. Four committees will be formed fromthese members:Compensation Committee (4 members)This committee makes recommendations on theamount of remuneration paid to the CEO and seniorexecutives, including base salaries, bonuses, andother compensation.Audit and Risk Management Committee(4 members)The audit and risk management committee will beresponsible for approving the company’s financialstatements and liaising with the external auditors.The committee is responsible for developing andimplementing an appropriate risk management strategy, including ensuring good internal control practices, which should encompass, but is not limited to,the following:N Proper segregation of dutiesN Maintaining complete and accurate client recordsalong with supporting documentationN Safeguarding client and company assetsN Proper and timely authorization of transactions andreconciliation of accountsN Creating an internal audit function (Note: To date,this has not been done by the committee)Audit committee members must be independent inAssignmentIn August 2013, Miriam noticed that some of the clientaccounts were becoming seriously depleted without anyapparent reason. In addition, clients’ petty cash accountswere being used more often than usual. The Legal Services department notified Miriam of changes to clients’wills that, while not unusual, weren’t frequent occurrences. Miriam wanted to investigate these apparentanomalies and make the necessary changes.Your assignment is to address each of the followingquestions:1. In general, what are the major objectives of internalcontrol? What is their purpose?2. What are the risks associated with providing financialservices such as those of a trustee? Classify each risk as(1) high, (2) medium, or (3) low.3. Review the processes outlined in the case and indicatewhere:a. Controls should be in place but do not exist, andb. Controls are in place but aren’t working effectively.4. For each of the controls that are in place, or shouldbe, identify whether that control is preventive ordetective.5. Was NCT’s senior management adequately performingits fiduciary responsibilities on behalf of its clients (seeFigure 5)? Give an example of how it was, or was not,meeting its responsibilities.6. What are the ethical responsibilities of senior management toward its clients?7. How would you test whether inappropriate activity(potential fraud) had occurred?their dealings with NCT. This includes any relationshipfor which they could receive a financial gain. At leastReal-Life Resultsone of the members of the committee must be finan-In this real-life business situation, fraud was uncoveredafter Miriam’s suspicions caused her to approach seniormanagement with her concerns. The company spentmore than $1 million to assess the extent of the fraud.Although the financial institution desperately wanted toavoid any negative publicity, news of the incident wasreported and caused significant embarrassment. All misappropriated funds were eventually recovered, and theperpetrator was sent to jail for several years. SFcially literate.Capital Projects Committee (4 members)The committee is tasked with the review andapproval of all major capital projects, includingexpansion and refurbishment of NCT facilities.Strategy Committee (4 members)The committee is tasked with developing and implementing corporate strategy on an annual and longterm basis.Ron Messer, CA, CMA (Canada), is a faculty member inthe School of Business at Kwantlen Polytechnic University inVancouver, Canada. You can contact Ron at (604) 733-9783or ron.messer@kwantlen.ca.August 2014IS T R AT E G I C F I N A N C E75

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