Internal control is the process implemented and maintained to provide reasonable assurance about the achievement of the entity’s objectives. It covers the company’s resources, systems, procedures, culture and structure. It very important for a company to possess and the lack of it can result in detrimental consequences. One example to showcase this is the famous study of “McKesson & Robbins”.
Founder Philip Musica adopted a fake name and started the pharmaceutical company. He faked his company’s value by misreporting his trade receivables. He did it by employing his younger brother, George Vernard and put him in charge of W.W. Smith & Co- a fictitious company. George would then order from the pharmaceutical company.
Another Musica brother who was working in the shipping department of McKesson & Robbins would then forge shipping documents, giving off the illusion that the goods were sent to the respective customers.
The fourth Musica brother who was appointed as the assistant-treasurer of the pharmaceutical company would then create fake cash flow by transferring money between several accounts.
This scheme worked as McKesson & Robbins paid commission to W.W. Smith & Co. for every sale.
The fraud was unveiled when company treasurer noticed the large transactions between the two companies.
The objectives of internal controls are:
1) Whether transactions are real
2) Whether transactions are recorded
3) Correct amounts assigned to transactions
4) Whether transactions are allocated to the correct account 5) Whether the figures are totalled correctly.
In the case of McKesson & Robbins, there were fake transactions occurring and no one knew. Whether this case fulfilled the rest of the objectives is unconfirmed due to the lack of information.
However, it is very likely that some transactions were not recorded or that the amount was incorrect as these are common traits that go along with fraud, especially in one where a whole family is running the fraud.