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The operations director of Yaya Company, Ben Janoon, realized that the product failure rate in quality control (QC) had increased significantly over the past two years, rising from 1% to 4% of monthly output. A review found nothing wrong with production but the remote and under-resourced QC lab, managed by Jane Goo, was identified as the likely cause. It was later discovered that Goo had been falsifying test results and selling products marked as failures to a local buyer, pocketing the profits along with her assistant. The internal control deficiencies at Yaya, such as lack of oversight of the isolated QC lab, contributed to Goo's fraudulent activities going undetected for an extended period.

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Lyn Abuda
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634 views

Case

The operations director of Yaya Company, Ben Janoon, realized that the product failure rate in quality control (QC) had increased significantly over the past two years, rising from 1% to 4% of monthly output. A review found nothing wrong with production but the remote and under-resourced QC lab, managed by Jane Goo, was identified as the likely cause. It was later discovered that Goo had been falsifying test results and selling products marked as failures to a local buyer, pocketing the profits along with her assistant. The internal control deficiencies at Yaya, such as lack of oversight of the isolated QC lab, contributed to Goo's fraudulent activities going undetected for an extended period.

Uploaded by

Lyn Abuda
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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In Yaya Company, operations director Ben Janoon recently realised there had been an

increase in products failing the final quality checks. These checks were carried out in
the QC (quality control) laboratory, which tested finished goods products before being
released for sale. The product failure rate had risen from 1% of items two years ago to
4% now, and this meant an increase of hundreds of items of output a month which were
not sold on to Yaya's customers. The failed products had no value to the company once
they had failed QC as the rework costs were not economic. Because the increase was
gradual, it took a while for Mr Janoon to realise that the failure rate had risen.

A thorough review of the main production operation revealed nothing that might explain
the increased failure and so attention was focused instead on the QC laboratory. For
some years, the QC laboratory at Yaya, managed by Jane Goo, had been marginalised
in the company, with its two staff working in a remote laboratory well away from other
employees. Operations director Ben Janoon, who designed the internal control systems
in Yaya, rarely visited the QC lab because of its remote location. He never asked for
information on product failure rates to be reported to him and did not understand the
science involved in the QC process. He relied on the two QC staff, Jane Goo and her
assistant John Zong, both of whom did have relevant scientific qualifications.

The two QC staff considered themselves low paid. Whilst in theory they reported to Mr
Janoon, in practice, they conducted their work with little contact with colleagues. The
work was routine and involved testing products against a set of compliance standards.
A single signature on a product compliance report was required to pass or fail in QC
and these reports were then filed away with no-one else seeing them.

It was eventually established that Jane Goo had found a local buyer to pay her directly
for any of Yaya's products which had failed the QC tests. The increased failure rate had
resulted from her signing products as having 'failed QC' when, in fact, they had passed.
She kept the proceeds from the sales for herself, and also paid her assistant, John
Zong, a proportion of the proceeds from the sale of the failed products.
a.) The following observations are the apparent internal control deficiencies of Yaya
which has resulted to a significant increase of product failures:
1. Lack of check and balance in the QC department. There being only 2 staff in
that department is prone to corruption since it is easy for the 2 staff to
collaborate with each other for whatever anomalies they may want to do for
their own personal benefits.
2. There is an absence of actual, surprise ocular visits in the QC laboratory
being situated in a remote area thus, creating a tendency to bypass the
company’s QC standards because the staff there are just being complacent
that they can do whatever they want since there is no one from the higher
management who regularly observes their lenient adherence to company’s
product standards;
3. The operations director’s sluggishness and lack of foresight have led to the
dilemma of the company. Mr. Ben Janoon’s failure to ask a regular product
failure rate report has made him realized only very lately that the failure rate
had risen significantly; every failure rate of the product no matter how minimal
it is, should be constantly monitored no matter how gradual the effect may
seem;
4. A single signature on a product compliance report cannot be relied upon
since there is an absence of check and balance whereby the approved report
of the other officer of the company should be or must be counter-checked by
another independent officer from another department in order to establish the
veracity of the report and finally,
5. There was a lack of dialogue, no regular QC meeting was conducted which is
very essential to deliberate the issues concerning the product’s quality,
problems encountered by the staff and even with their personal issues such
as underpayment of salary and the like. All off these factors have contributed
a lot to the failure of the QC department of Yaya which had eventually
resulted to losses because of those so-called substandard products that were
just wasted as far as the company is concerned. It has paved a way to
corruption by manipulating the report to increase the number of products that
failed QC and are being sold to a local buyer for the own personal gain of the
two conspirators, Jane Goo and John Zong.

b.) In order to address the internal control deficiencies, the following should be done
at Yaya:
1. There should be an independent staff or officer of the company who will
regularly check the flow of work in the QC Department and will directly report
to the Operations Director;
2. If it is impossible or tedious on the part of the operations director to make an
ocular inspection of the QC lab, then he may designate one or two of his
trusted staff or subordinates to conduct a surprise inspection and audit as to
how the quality standards are being observed or followed;
3. The operations director and other equivalent officer of the company should
ask for a regular report from QC and every minimal change of the product
failure rate must be given due consideration by investigating the very people
who are doing the QC works; in this way, report manipulation can be avoided
if not, then easily detected and controlled;
4. There should be at least 2 signatories or more of the QC Compliance Report
to make sure that it is always accurate and reflecting the actual output of the
products in terms of complying the product quality standards. Another
effective method is to put another person for a certain period of time to make
the compliance report in lieu of the staff who is regularly assigned to it. That
other person must be expert and knowledgeable all the way from the initial
process up to the final output and must understand all the scientific
procedures involving the product control and processes and
5. As most of the companies are doing, regular departmental meeting should be
done, conduct a regular dialogue among the staff of that particular
department with the higher officer of the company to discuss thoroughly the
progress of the department, the problems the staff are encountering and other
issues that need immediate resolution so as to continue a smooth and
productive work flow and to ensure that there is always a healthy working
environment-free from corruption or anomalies.

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