Candace Smith is a member of the internal audit staff at Ace Ltd., a large, diversified company with subsidiaries in numerous industries. While reviewing prior audit plans, Smith realized that one subsidiary, CRL Ltd., had not been subject to an internal audit since its acquisition five years before. When Smith was reviewing the financial results for CRL, she noted that actual expenditures were much higher than budgeted and historic figures. She met with the chief audit executive (CAE) and recommended that this subsidiary be included in the current-year audit plan. The CAE agreed with her assessment, and auditors began to look into CRL's history.
CRL was founded by Wayne Boyd when he was in his early 30s. Boyd had a larger-than-life personality and earned a reputation for lavishly entertaining customers and prospects. Seven years after founding CRL, he sold a majority interest to Ace for more than US$30 million. He remained president of the division, received a generous salary, and was given a US$500,000 annual stipend to cover his entertaining expenses at his various properties. He also had access to a corporate credit card and made frequent use of his expense account.
Accounting and other core business processes remained under Boyd's control and were performed by CRL personnel. Boyd was used to having total control over all aspects of CRL, which allowed him to play fast and loose with the accounting records. He regularly pushed his personal expenses through the company. When Ace took over, it implemented a budget, but day-to-day operations remained in the control of Boyd and his family.
When the internal auditors arrived, they identified many over-budget accounts and requested supporting documentation. Many of the supporting documents did not appear to relate to either CRL or Ace, but to Boyd's personal purchases. Internal audit began to interview CRL employees who were hesitant to speak with Ace representatives. While CRL's accounting personnel were not forthcoming, Boyd's personnel assistant, Mary White, was a wealth of information. She told Smith and the other internal auditors about Boyd and his personal financial habits.
After the acquisition, Boyd went on a spending spree, buying a plane, hunting lodges throughout the region, and a custom vehicle made for his daughter as a birthday present. Because CRL was located 750 miles away and its accounting staff was segregated from the rest of Ace, management at Ace was unaware of these...