The Violet Bay School District Deficit of 2005: Evaluating Internal Control and Identifying Risks

ABSTRACT: In August 2005, Violet Bay taxpayers were surprised to learn that their school system had amassed a $7 million deficit for the 2004–2005 budget year, despite previous assurances of a surplus. Ultimately, the actual deficit was found to be $12.1 million. A special grand jury investigation uncovered numerous internal control problems that contributed to the deficit.This instructional case provides students the opportunity to gain a better understanding of the importance of internal control, particularly a strong control environment, through examination of the problems encountered by an actual governmental entity, renamed the Violet Bay School District. It also gives students some practical experience with tasks such as gaining an understanding of an entity and identifying its business risks, evaluation of internal control using the five components of the Committee of Sponsoring Organizations (COSO) framework, identification of fraud indicators, and consideration of the likelihood of fraud occurrence. The case also provides exposure to ethical issues.