March 31, 2016
Westchester Distributing Case
Vince Patton at Westchester Distributing, Inc. is facing a quite a dilemma in the face of a recent fraud that has been uncovered. After two employees, Carter Mario and George Pavlov, sold beer to a customer with the offer of a “kickback” and subsequently submitted false expense reports to be reimbursed for the cash outlay, and after Joe Roberts, the VP of Administration perpetuated the act by misappropriating a neon sign to pay off the customer, Patton finds himself in violation of the California Alcoholic Beverage Control and in danger of being out of business for 45 days. In order to come to a solution for ...view middle of the document...
Joe Roberts was able to rationalize his actions by saying he was just trying to contain the situation so as not to bring trouble to Vince and Elizabeth. Finally, the perpetrators faced financial pressure. Namely, both Carter and George had bonuses tied to sales quotas on the item in question. Although they had clear motivation—for Carter and George it was monetary, while for Joe it was professional—none of the perpetrators benefitted due to the fact that they were caught. Had the scheme succeeded, George would have earned a $500 gift card, Carter would have earned a cash bonus, and Joe would have been saved the embarrassment and consequences of the two shareholders being aware of his oversight.
The incident occurred partially because Vince and Elizabeth failed to see the risks present in the situation. Whenever financial incentives are tied to specific activities or products, there is the risk that an employee will game the system. In this case, the incentive was tied to a difficult-to-move product (as evidenced by Mr. Moon’s inability to sell the product), making that risk even higher. Beyond this risk, there was also a lack of supervision within the company. Vince and Elizabeth, the two shareholders and executives, did little to supervise sales and sales managers. As Carter mentions in his letter to Mr. Patton, Vince and Elizabeth never went out on calls, and had little communication with customers. In a small company such as theirs, owner supervision mitigates many risks.
While owner supervision is more of a practice than a control, a number of internal controls could be put in place to help prevent another incident such as this. One of the clearest weaknesses in the many processes of the sales and sales management functions is the expense reimbursement process. Specifically, there are not controls put in place to ensure the validity of expense claims. No rule exists requiring receipts to be submitted, and broken bottle claims are made purely on the customers’/salesman’s/drivers’ word. Further, no impartial third parties check the reasonableness of the expenses claimed. In order to mitigate these issues, receipts for lunches and...