Conflict of Interest in Purchasing: Should Companies Allow Agents to Start Their Own Businesses?

1. Tutorial_12

2. Discussion Question11.7 (Romney page 447) AQ 12.1 • Should companies allow purchasing agents to start their own businesses that produce goods the company frequently purchases? Why? Would you change your answer if the purchasing agent’s company was rated by an independent service, like Consumer Reports, as providing the best value for price? Why?

3. AQ 12.1 • The primary issue here is conflict of interest. If a purchasing manager owns a business that supplies goods to his employer, how does the employer know that they are receiving the best quality goods for the lowest prices? • By allowing a purchasing manager to own an independent company that supplies his employer, the employer is in effect dis-aligning the interests of the purchasing manager with the interests of the employer in that the higher the prices the supply company charges the more money the purchasing manager makes

4. AQ 12.1 • The employer may find some comfort if the purchasing manager’s supply business is reviewed or audited by some independent organization, however, independent rating organizations cannot audit every transaction. • Since the purchasing manager has intimate knowledge of the employer’s operations and cost structure, he has the ability to structure transactions that could conceal purchases that were favorable to the purchasing manager’s business and unfavorable to the employer.

5. AQ 12.1 • Given the degree of oversight that any prudent employer would have to implement to make sure the purchasing manager provided the best quality for the best price, why would an employer want to allow such an arrangement?

6. AQ 12.2Problem 11.1 (Romney p447) Parts (a) to (h) • a. A purchasing agent orders materials from a supplier that he partially owns.

7. AQ 12.2 • a. Purchase orders should be approved by and matchedto a purchase requisition by the purchasing manager. An approved list of vendors should be maintained by Management. The purchasing manager also needs to ensure that orders are placed only with approved vendors. Also, company policy should require that purchasing agents disclose any conflict of • Interest.

8. AQ 12.2 • b. Receiving-dock personnel steal inventory and then claim the inventory was sent to the warehouse.

9. AQ 12.2 • b. Warehouse personnel should be required to count goods received and acknowledge receipt of the specified quantity by signing a copy of the receiving report. This is documenting all internal transfer of goods.

10. AQ 12.2 • c. An unordered supply of laser printer paper delivered to the office is accepted and paid for because the “price is right.” After jamming all of the laser printers, however, it becomes obvious that the “bargain” paper is of inferior quality.

11. AQ 12.2 • c. Receiving department personnel should be required to verify that a purchase order exists prior to accepting a shipment. Also, invoices should be compared to purchase order records prior to approval of the invoices for payment.

12. AQ 12.2 • d. The company fails to take advantage of a 1% discount for promptly paying a vendor invoice.

13. AQ 12.2 • d. Proper invoice filing by payment date.

14. AQ 12.2 • e. A company is late in paying a particular invoice. Consequently, a second invoice is sent, which crosses the first invoice’s payment in the mail. The second invoice is submitted for processing and also paid.

15. AQ 12.2 • e. When an invoice is approved for payment, the related supporting records (receiving report and purchase order) must be reviewed. At the conclusion of this process, the supporting documents should be cancelled and marked "paid." In this way the supporting records cannot be used twice to support payment of a duplicate invoice.

16. AQ 12.2 • f. Inventory records show that an adequate supply of copy paper should be in stock, but none is available on the supply shelf.

17. AQ 12.2 • f. Periodic physical count of inventories should be taken, and the resulting counts used to correct system records.

18. AQ 12.2 • g. The inventory records are incorrectly updated when a receiving-dock employee enters the wrong product number at the terminal.

19. AQ 12.2 • g. Most effective here would be closed loop verification in which the item number is entered as input, and the system displays the corresponding item description and then asks the user to verify that this is the desired item.

20. AQ 12.2 • h. A clerical employee obtains a blank check and writes a large amount payable to a fictitious company. The employee then cashes the check.

21. AQ 12.2 • h. Unused blank company cheques should be stored in a secure location. In addition, the person signing cheques should be different from the person authorizing disbursements. Supporting documents (purchase order and receiving report) should be reviewed before signed.

22. AQ 12.3Problem 11.16 (Romney p456) • Match threats in the first column to appropriate control procedures in the second column. • 1. Failing to take available purchase discounts • d. File invoices by due date.

23. AQ 12.3Problem 11.16 (Romney p456) • 2. Receiving unordered goods • a. Accept only deliveries for which there is an approved purchase order.

24. AQ 12.3Problem 11.16 (Romney p456) • 3. Recording posting errors in accounts payable • e. Compare total invoice amount processed to the difference in vendor account balances before and after check processing.

25. AQ 12.3Problem 11.16 (Romney p456) • 4. Paying for goods not received • m. Compare quantities on invoice to quantities received into inventory.

26. AQ 12.3Problem 11.16 (Romney p456) • 5. Accidental loss or deletion of data • o. Use external and internal data labels.

27. AQ 12.3Problem 11.16 (Romney p456) • 6. Kickbacks • f. Train employees on how to properly deal with unsolicited gifts.

28. AQ 12.3Problem 11.16 (Romney p456) • 7. Requesting unnecessary items • k. Design an AIS that integrates databases from various subunits.

29. AQ 12.3Problem 11.16 (Romney p456) • 8. Making errors in counting • j. Require receiving clerks to sign a receiving report.

30. AQ 12.3Problem 11.16 (Romney p456) • 9. Stealing inventory • b. Document all transfers of inventory with the company.

31. AQ 12.3Problem 11.16 (Romney p456) • 10. Purchasing goods of inferior quality • i. Hold purchasing managers responsible for the costs of scrap and rework.

32. AQ 12.3Problem 11.16 (Romney p456) • 11. Preventing stockouts and/or excess inventory • h. Install a perpetual inventory system that uses bar-code technology.

33. AQ 12.3Problem 11.16 (Romney p456) • 12. Paying the same invoice twice • l. Invoices should be paid only when accompanied by a purchase order and receiving report. • p. Cancel all supporting documents when checks are issued.

34. AQ 12.3Problem 11.16 (Romney p456) • 13. Purchasing goods at inflated prices • g. Maintain price lists for frequently purchased items and use competitive bids for specialized orders.

35. AQ 12.3Problem 11.16 (Romney p456) • 14. Misappropriating cash, checks, or EFTs • n. Employ proper segregation of duties.

36. AQ 12.3Problem 11.16 (Romney p456) • 15. Purchasing goods from unauthorized suppliers • c. Periodically review lists of approved vendors for unapproved changes.