Accounting 26th Edition by Carl Warren ,Jim Reeve ,Jonathan Duchac

Exercise 21

Internal control of cash payments
Paragon Tech Company, a communications equipment manufacturer, recently fell victim to a fraud scheme developed by one of its employees. To understand the scheme, it is necessary to review Paragon Tech's procedures for the purchase of services.
The purchasing agent is responsible for ordering services (such as repairs to a photocopy machine or office cleaning) after receiving a service requisition from an authorized manager. However, because no tangible goods are delivered, a receiving report is not prepared. When the Accounting Department receives an invoice billing Paragon Tech for a service call, the accounts payable clerk calls the manager who requested the service in order to verify that it was performed.
The fraud scheme involves Mae Jansma, the manager of plant and facilities. Mae arranged for her uncle's company, Radiate Systems, to be placed on Paragon Tech's approved vendor list. Mae did not disclose the family relationship.
On several occasions, Mae would submit a requisition for services to be provided by Radiate Systems. However, the service requested was really not needed, and it was never performed. Radiate Systems would bill Paragon Tech for the service and then split the cash payment with Mae.
Explain what changes should be made to Paragon Tech's procedures for ordering and paying for services in order to prevent such occurrences in the future.