- Using the Fraud Triangle analyze the ‘One Piece at a Time’ video scenario and explain how the environment was favorable to Fraud.
- Assume the ‘One Piece at a Time’ video scenario could happen. If you are the operations manager responsible for the assembly line, what 1-2 key controls would you implement?Explain how the control addresses the risk.
- Controls are important in all the OTC processes including shipping. What would be different in the controls of a purely domestic company vs. an international company? Give 1 – 2 specific examples.
- As consumers we encounter (knowingly and unknowingly) inventory controls all the time (e.g. locked jewelry cases).What are 1-2 less obvious inventory control measures used. Are these measures effective?
1. Back in the years between 1949 and 1970, the idea of work space video surveillance and digitally tracked inventory management systems would be normally considered corporate dystopian mythos. The best form of surveillance that companies had at the time were responsible and loyal foremen and managers who work as administration and shift managers for the assembly line. But then the issue becomes “who manages the assembly line management, aside from monitoring factory-wide performance?”, which nobody was too sure off at the time. I doubt that the Cadillac manufacturing plant in Detroit was any different, and probably had assembly line management that didn’t concern themselves enough with component inventory or monitoring the work space.
2. Taking on the role of operations manager for the assembly line at the Cadillac Factory in Detroit, it is necessary to consider the technology and cost of available inventory control at the time. Among the inventory control options that were available between 1949 and 1970, I thought that the concept of the segregation of duties was crucial to visit and would help with the implementation of other controls. The segregation of duties will help significantly quell mistakes, either on purpose or by accident, in the system. This occurs because it makes it impossible for those who physically handle the inventory to also work as those who account for the inventory being handled. My next control would be to have inventory counted more regularly across all parts of the production process to account for any missing or stolen parts.
3. In the order to cash processes, goods leaving the manufacturing phase face similar control issues that can negatively impact relations between the manufacturers and customers. This is why it is important to make sure all branches of the company around the world adhere to the same standards in discipline and technology, and remain transparent among themselves in terms of training and finance. Common issues that arise when these standards are not met include but are not limited to quality differences between international branches, incorrect orders being delivered, orders being delivered to the wrong place, and orders being delivered at the wrong times. While small companies that don’t need to worry about international branches might only want to keep track of their inventory records, quality control, and shipment locations, international companies with multiple branches require more elaborate and complex controls. These controls include an organization-wide inventory management system that can be used to track inventory through every step of processing and shipping to the customer, as well as an international quality standard that has to be met and is constantly regulated so as not to disappoint customers.
4. One of the less obvious but most common inventory controls we run into on almost a daily basis is radio frequency identification (RFID) systems. These systems are relatively new, but one of the fastest growing inventory control technologies being adopted by most large large companies that deal with shipments and direct selling of valuable inventory. One of the more common examples of RFID being used that we, as consumers, see is at technology and luxury clothing stores. These stores use it to track inventory in real time and is also used as a security measure thanks to RFID readers that can read RFID stickers in a surprisingly large area around them. Although one of the more expensive inventory controls, RFID is very discreet and has proven effective in today’s shopping and shipping environments.
To add on to the first point, this lack of proper administration in the production line presented a relatively easy opportunity. In terms of incentive, having luxury waved in your face while making a middle to low income can be incentive enough to some people to want some luxury of their own. The rational itself perplexes me a little bit, as there is a high risk to performing the action, but he must have seen the probability of getting caught as small enough for him to go through with it.
1. The three elements of fraud triangle that are necessary for a fraud to be perpetrated are – MOTIVATION, OPPORTUNITY and RATIONALIZATION. The favorable scenarios and environment in the analysis of “‘One Piece at a Time’ video scenario” could be answered by thinking of the following questions in mind:
What motivated the auto worker to commit theft from Cadillac assembly line?
MOTIVATION: Usually motivating element in fraud triangle is financial in nature and usually private. In this scenario, the auto worker had a wish to buy an expensive car like Cadillac, but he could not afford them as it was way too expensive. So, he devised a plan and sneaked the expensive automobile items from the company.
Are there any opportunities to steal?
OPPORTUNITY: This element quite often takes the shape of inadequate internal controls. In our scenario, we could see that employees had a favorable opportunity to carry their luchboxes inside the working unit and there were no adequate physical security and detection controls in place which favored him to steal small auto parts in his lunch box.
I believe this is the only element over which the company has complete control. Without opportunity, fraud generally cannot occur hence, by implementing strong internal controls company could potentially avoid the opportunities to commit fraud.
“Everyone are doing it so is it okay for me to do the same!!!”
RATIONALIZATION: We could say that this is the backbone of fraud triangle. It is the kind of justification that comforts the perpetrators. The idea that “everyone is doing so I’m doing it!!” can get the snowball of inappropriate behavior rolling. From our scenario, we can understand that all the employees were carrying their personal items (like lunch box) inside the work-unit so it was kind of rationalization for him to carry his lunch box like others. Rationalization of committing fraud is the most difficult element to observe because it takes place in the mind of the perpetrator.
All these tree elements might occur in varying degrees in order to occur fraud. Being aware of these three conditions can help managers and business owners minimize the risk of fraud in their organizations.
Hi, Deepa,
Thank you for sharing such a completed answer. Your answer about the opportunity section just mentioned a point that I did not come up at the beginning, which is allowing the employees to take a lunch box with them. It is definitely a good point for this question, and it is a bad internal control for the company.
Hi, Deepa,
Thank you for your sharing, you make a good analysis. I didn’t think about export tax, yes it definitely complex not just about the accounting and finance process, but also about the transports and the good report process though the customers.
1. Opportunity: The Company is lack of oversight because it has poor internal controls. One reason for poor internal controls would be equipment shortage. Back in that time, no firms use security to secure their property. If they have a camera on Cadillac Assembly Line, employees would be more afraid to steal auto parts.
Incentive/Pressure: The incentive of employees to steal auto part would be they watch many beautify Cadillacs been build up every day. In addition, he will drive everybody wild when he comes through their town with a Cadillac.
Rationalization: The employee would not able to buy a Cadillac until he retired, but he can get one and cost almost nothing by stealing auto parts.
The employees were in an environment that has a high opportunity to successfully achieve a beautiful car that he could not afford until he retired. With all these conditions existed, the employee continually steals auto parts from assembly line multiple years.
2. During that time, I would like to use physical counting or cycle counting to avoid the theft of auto parts.
• Physical Counting: Periodic (e.g. yearly, quarterly …) Frequency can depend on risk (e.g. value)
• Cycle Counting: Continuous counting of sections of the inventory
Whatever physical counting or cycle counting, it would check whether the number of auto parts is not equal to the number of inventory. However, these methods are time-consuming.
Nowadays, we have higher technical skills. Therefore, we are able to have a security camera on the assembly line, or we can use machines to build up cars directly instead of doing it manually.
3. For the purely domestic company, they do not worry about export tax at all. However, it is an important thing for the international company, especially for shipment. For example, a company sold their product to customers from another country, and the price on the contract is set up by the current export tax. However, the export tax has been increased during the process of producing, so the company loses money from late shipment. A control for this would be to have enough products in inventory, so the company can ship products right after they sign the contract.
4. RFID is a widely used technique that effetely manages the inventory. However, a well-designed accounting method for inventory can also help the company to manage its inventory. For example, FIFO (First-In-First-Out) can help the company sell those products they bought earlier, so there would less overdue products for a company.
Ai,
Great Point! According to the National Retail Federation (NRF), shoplifting, employee theft, and administrative error (collectively known as inventory shrink) caused US retailers $48.9 billion and $46.8 billion in 2016 and 2017. The inventory shrink accounted for nearly 2% of the retail sales. RFID is a great cost-effective solution for preventing inventory shrink. The retail industry observes that the RFID system is most valuable in preventing and reducing losses due to theft as products move through the supply chain. According to NRF, over 50% of inventory shrink is caused by employee theft, vendor fraud, and administrative error. The biggest benefits of RFID technology is that it brings accountability into the supply chain by helping retails to track every single product through the supply chain.
1. Fraud triangle
a. Opportunities
i. Lack of proper internal controls and oversight are favorable factors for the auto worker to commit fraud. First, the auto worker was allowed to carry big size container, which was his lunch box in this case, into the assembly line. If the company implemented an inspection process when workers enter and leave the assembly lines, with his big lunchbox, the auto work left with a lunch box full of gears. If the company implemented an inspection process when workers enter and leave the assembly lines, this fraud would have been prevented. Second, the Cadillac didn’t have effective inventory management in place. It might be difficult or impractical to manage and count small parts like nuts, bolts, or screws but the missing of bigger auto parts like engine or whiles was also unnoticed. Besides, the worker’s friends also helped him to steal auto parts. The collision in a fraud is also an indication of insufficient internal control.
b. Incentive:
i. when the auto worker worked on the Cadillac’s assembly line, he had been emotionally desired for a Cadillac automobile, which he could not afford. We can find evidence from the song: “cause I always wanted me one that was long and black”. The auto worker’s desire for a Cadillac automobile motivated him to commit fraud by stealing auto parts.
c. Rationalization
i. The auto worker might rationalize his fraud in the following way: first, those parts cost almost nothing to Cadillac comparing to the company’s profits. Second, I work hard for the company, so I deserve more from the company.
2. If I were the operations manager responsible for the assembly line, I would implement following controls:
a. Implement inventory management process to properly record the usage and stock detail about inventory. If the stock and usage information of the inventory is properly recorded and reviewed, the missing or misuse of inventory could be discovered.
b. Set up checkpoints at the entries of the assembly line. This would prevent auto workers from sneaking out auto parts from the assembly line.
3. Each country has its own legal system, industrial standards, and custom. A company operates purely domestically only needs to comply with law and regulations in the country where the company has appearance. This ease the burden on a company when the company designing its control policy. A domestic company can apply a single control policy to all branches because all it branches are subject to identical laws and regulations. The situation will be different companies operate internationally. An international company has to consider various factors in different countries where it operates business. The company might not be able to apply identical controls to all the branches. A control that is effective and valid in one country might be insufficient in other countries because each country has unique requirements for business. For example, if a pure US-based financial institute collects and process customer personal information, it has to take the Gramm Leach Bliley Act (GLBA) into account when designing controls. If the company extended its operation into Europe Union, it now must comply with the GDPR as well.
4. We can find one of the most advanced but least obvious inventory control systems in Amazon’s cashierless convenience store – Amazon Go. First, Amazon only allows customers with Amazon accounts and a smartphone with the Amazon app installed to enter its convenience store.
In each of its store, Amazon installed hundreds of image sensing camera, combining with advanced AI and machine learning technologies, Amazon is able to detect and track every single product whether it is being removed from the shelves, being held in your hands, or put in a bag. When a customer leaves the store, the system will detect all items being carried by the customer, calculate the total, and send the bill to the customer’s Amazon account. This system has helped Amazon entirely eliminated the shoplifting.
1. Using the Fraud Triangle analyze the ‘One Piece at a Time’ video scenario and explain how the environment was favorable to Fraud.
Funny song, interesting story. I watched it through YouTube. The Fraud triangle is basic about three scenario, like fires, fraud would probably happened, when you collect three of them.
The first is the pressure on the individual, the man on that song felt frustrated when he watched others “beauties roll by” but as a worker “went to Detroit workin on a sembly line” he can’t afford a car “worth at least a hundred grand”.
The second is the opportunity to commit fraud, as a worker “went to Detroit workin on a sembly line” he is able to still apartments with helps from his friends. By putting them into meal boxes.
The third is the ability rationalize the crime, He “have never considered myself a thief”, because, as the name of this song he only stole “one piece at a time”.
2. Assume the ‘One Piece at a Time’ video scenario could happen. If you are the operations manager responsible for the assembly line, what 1-2 key controls would you implement? Explain how the control addresses the risk
If I am the operations manager responsible for the assembly line, I would probably set mantel detector for people enter and out to make sure no pieces have been stolen.
But for manufactory industry, I believe the controls for the protection of Intellectual property matters more. It has become a big problems preventing the innovations and the development of China economics. I am familiar with it cause it destroyed Chinese Animation industry in late 80s. It significantly depends on derivatives products to make profits. But when new ideas or designs just enter the manufactories, the competitors who steals the pictures could even put it into the market earlier than the original designers. So when the original designers can’t make money for their efforts, many of them have to do other jobs. Less talents are able to stay in the industries, then it fell even faster. Fortunately, our government has realizes this problems, and the situations has been improved years by years. More and more Chinese consumers are willing to wait or pay more money for the original edition for supporting the people who are the real creators.
3. Controls are important in all the OTC processes including shipping. What would be different in the controls of a purely domestic company vs. an international company? Give 1 – 2 specific examples.
The set of currencies, time zoom may be varies. Besides for the personal information corrections, different areas may have different laws and regulations. Like in EU, the corrections for any Europeans must be notified, in OTC processes, it means the notification must be popped out.
4. As consumers we encounter (knowingly and unknowingly) inventory controls all the time (e.g. locked jewelry cases). What are 1-2 less obvious inventory control measures used. Are these measures effective?
Like in the supermarket, the monitors are always on, and you can saw them placed on your sights to tell you, you are monitored. I think it works. At least, the thief may steal hidden beyond the CCTVs.
1. There is no ERP system in American company between 1940s and 1970s, which means lots of American companies do not have effective and completed regulation system to tract material supply during the production process. At the meantime, American economy go up significantly. The situation of American companies stay with high performance, so they do not care about material lost that much. Lack regulation lead to perceived opportunities, which means there are poor internal controls and lack of oversight to track material in the production process. According to the song, it shows that the person want a flash car to show with pretty girl, so there is a personal need as incentive to push him steal car part from the factory. As we can see, during the period in the case, company should be really profitable because American luxury car was really popular with lower gas price. The company does not care about material regulation that much because of Company is profitable,
2. In my opinion, material tracking is essential part to prevent this scenario happened again. Material tracking should include the date of material coming to the stock and the date of material put in the car. In addition, Material tracking should show the number of stock for every day changing. Moreover, the company can do personal control to make a regulation to show what employee can do and cannot do. Especially what kind of thing employees cannot take home and Regulation also can push efficient production running.
3.Domestic firms operate mostly or completely within the United States. They may import supplies or export products, but these activities normally represent a comparatively small share of total business activity. Domestic companies are typically governed by U.S. securities laws. Their financial reports are normally constructed according to generally accepted accounting principles. International firms are headquartered in the United States but maintain significant investments outside the country and have geographically diverse profit centers. U.S. operations and parent company governance are typically determined by U.S. laws, and parent company accounting normally follows GAAP, International Companies have to face different transportation situation based on the different countries situation. They need to build different system to regulate different area transportation process. However, Domestic companies only need to focus on the US market, so there is not lots of complicate regulation and system to follow as tracking process.
4. Real-time is becoming the new normal. Older tracking methods generally relied on a dedicated period of time to catch up on inventory, such as taking counts at the end of the day or the end of the week. Today, scanning technology and more advanced systems are making it possible to keep track of inventory in real-time. That means your system is updated anytime a product makes a move, whether that’s getting shipped out to a different facility or placed on the line for the first time. This leads to faster, more accurate insights, and leaves less wiggle room for potential mistakes and confusion. Big data is leading to more advanced insights. Big data is a general advancement in technology that’s making operations for most companies radically different, both on the inside and outside. In the inventory management space, this means companies are gathering more specific insights about their products and operations than ever before, and they’re using them to form more impact conclusions about how their businesses operate. Companies are learning more about what processes are most efficient and which ones need to change, and they’re getting more helpful data about who their customers are and what they need from their brand. Ultimately, this leads to a more complicated data system to manage, but a more effective and beneficial one.