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This posting addresses check fraud and losses.

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Heat Oil has a checking account with the Bank of Stern for its payroll expenses. One day Garnett, who has a checking account at Jordan Bank, breaks into Heat Oil's office and steals the company's checkbook. He makes out a check to himself for $200, and indorses the check to Best Buy for the purchase of an iPod. Best Buy deposits the check into its own account with Jordan Bank. The Bank of Stern pays the check. Garnett takes his iPod and boards a flight to Los Angeles.

(1) What party is likely to absorb the loss and why?

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Bank of Stern - although they are the bank for Heat Oil, if they do refund the money, which is a relatively low amount to begin with, it won't be until after several months, if at all. The bank may (not definite) have a policy buried somewhere that account holders aren't responsible for thefts against their account. The likelihood of the bank actually refunding the money to the company is slim, even though there is most likely fine print somewhere saying they will refund against theft.

Garnett ...

Solution Summary

The solution provides a detailed discussion about Garnett, who committed check fraud at Heat Oil and then boarded a flight to Los Angeles. The party most likely to absorb the loss is discussed. This solution is based on law and from my experience as a fraud investigator.

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This post addresses internal control, fraud & related issues

When a business finds itself vulnerable to fraud, it is usually due to lack of oversight and regularly scheduled meetings that would permit the reconciliation of accounts. It is often helpful for a business to have external audits conducted by outside services. The use of signature cards during any business withdrawal will permit the proof banks need to verify authenticity of the signer.

Proof of banking transactions could also be verified through use of pre-numbered checks, deposit tickets, and bank statements.

Accounting transactions should be conducted by individuals who have no contact with operations or sales of the business, just as operations or sales should not handle accounting transactions. The access to company books and handling of cash should remain separate, thus minimizing the possibility of fraudulent activities. Records would also have a better chance of remaining accurate.

If the business owner conducted the financial transactions of the business through electronic transfers and online banking, they could also verify all other business transactions and any expected deposit activity handled by other business personnel.

Authorization from the account holder for bank notification concerning any irregular or unexpected transactions, could limit financial losses as soon as they begin to occur. The establishment of regular financial activity and scheduled bill payment could also be conducted by requiring multiple signatures on company checks.

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