05 Sep

Conducting Corporate Fraud Investigations

The unthinkable has happened. We have good employees. Our people are honest. They don’t steal from us. They’re like family. We trust them. So it goes when a company discovers a fraud from within.

Then what happens?

After the initial shock wears off, it’s time to start investigating the situation. The company must know who did it, how the fraud was committed, and what controls can be put in place to stop fraud from happening again. This is all accomplished with an effective fraud investigation. Read More

22 Aug

Detecting Overrides of Internal Controls

Where can employees, outside consultants, and board members look for evidence of override of internal controls? This isn’t a simple list of numbers or documents that must be checked off. Instead, looking for improper override of controls requires looking for red flags that point to something being amiss.<!–more–>
<ul>
<li>Complete an analytical review, looking for unusual changes between periods in terms of dollars and percentages.</li>
<li>Look for large, round numbers that enhance the financial position, especially if these numbers just happen to occur at the end of an accounting period</li>
<li>Examine reversing entries at the beginning of an accounting period, looking for evidence that these entries relate to an improper entry at the end of the previous period</li>
<li>Determine whether transactions have been completed on an arms’ length basis, and with legitimate business partners</li>
<li>Look for evidence of undisclosed relationships or agreements</li>
<li>Listen carefully to employees who may be reporting wrongdoing or hinting that there is a problem</li>
</ul>
When examining these things there are three critical items which are the most troublesome:
<ul>
<li>Missing or altered documentation</li>
<li>Withholding of information</li>
<li>Unexplained variances in numbers</li>
</ul>
All three of these suggest something is not right. If there is nothing to hide, why are things being hidden? That is often the first clue to a much larger problem.

<strong>Trust but Verify</strong>
The key reason why employees are able to steal from companies is that the employees are trusted. That trust is obviously inherent to being able to operate a business. If you don’t trust employees to do their jobs, the business cannot accomplish anything.

However, that trust should not be blind trust. Skepticism is an essential element for everyone involved in the process of ensuring that a company’s assets are protected and the financial statements are accurate.

The skepticism must go beyond simply acknowledging that fraud risks are present in every company. Professionals must be alert to the most likely risks and must be willing to ask difficult questions and required support for the answers given. The process of asking questions might be uncomfortable, but it’s necessary to get to the bottom of things.

Remember that if an executive is intent on overriding controls to cover dishonest or unethical behavior, she or he has also likely taken steps to conceal the override. These instances won’t just jump right out at you and announce themselves. Detecting the override of controls and the associated fraud or malfeasance will take a lot of work and a bit of luck. But it is nonetheless important to make the search for the override controls a regular (and important) part of the financial management of a company.

11 Mar

Fraud is Just Part of a Controller’s Job

Can you believe people actually admit to this stuff? A survey of accounting controllers done by FloQast found that lots of controllers think fraud is a routine part of their jobs.

There are some awfully interesting results. 69% of the participants said their job is that of a risk manager who oversees internal controls. (For those who don’t know, internal controls are the policies and procedures that ensure the numbers are recorded accurately and that prevent fraud.)

64% say they’ve experienced pressure to cook the books. That’s not necessarily surprising. Results are everything in many companies, and I can easily envision executives asking how the numbers can be prettied up. Read More

14 Feb

A Simple Anti-Fraud Training Outline

Education is a highly effective fraud prevention technique for companies. Studies have shown that companies with anti-fraud educational programs in place can cut their fraud losses in half. By educating employees, management is giving them the tools to help look for and stop fraud. This information helps them know what behavior is acceptable and not acceptable.

The training does not have to be elaborate. It simply has to show employees what to look for, highlighting the most common areas of abuse.  A company’s training session could (should?) include things like this:

  • Introduction to fraud: Provide the basics about fraud, how it is committed, and how it affects the company.
  • Areas of the company most vulnerable to fraud: Tell employees about the most at-risk areas and assets of the company so they can be on the lookout.
  • Common ways that fraud could be committed at the company: Give concrete examples of some of the most common frauds that employees might witness.

Read More

16 Jan

Manual Cash Disbursements and Fraud

Companies typically have a standard way of initiating cash disbursements like payments to vendors or employees. Often this involves entering an invoice into the accounting system, ensuring proper approval for payments, and then generating the electronic transfer or check. Sometimes invoices are entered at scheduled intervals and payments are issued on certain days of the week.

Any disbursement that falls outside of these procedures could be considered a manual disbursement. That is, it is initiated manually and issued under special circumstances.

Probably the most common type of manual disbursement occurs in a company that has an accounts payable process through which all vendor payments should flow. Suppose a vendor drops off materials and needs to be paid immediately for that delivery, and there is not a chance to get the vendor payment through the regular accounts payable process. A check will be cut directly to the vendor, and the accounting system is updated later. This is a classic example of a manual disbursement. Read More

13 Dec

Large Data Sets in Financial Investigations

Complex financial investigations involve large sets of data, numerous accounts, multiple players, and lightning fast movements of money. Being able to accurately document these movements of money is the key to the financial portion of a case, whether it involves embezzlement, bribery, misconduct in office, money laundering, or divorce.

Forensic accountants can quickly become overwhelmed by the sheer volume of data that needs to be analyzed. Even with all of the modern technological tools available, many of the tasks in financial investigations are still done manually. Why? The format of accounting statements and reports varies so much that there is no single solution that can help capture that data. Instead, fraud investigators turn to manual data entry much of the time. Read More

03 Oct

Can Fraud Investigations Reduce Fraud?

When consumers think about investigating fraud, they do not usually think of the investigation as part of an overall plan to reduce fraud in a company. An investigation is typically seen as a reactive process that is only engaged in when a major problem is identified. Fraud investigations are representative of something completely negative, and they should be avoided at all costs, because if we do not have fraud investigations, then we do not have fraud.

The reality is not quite so fatalistic. Fraud investigations can and should be a routine part of a proactive fraud prevention program. Anti-fraud education and proactive fraud prevention procedures are essential to reducing corporate fraud, but fraud investigations are a third and equally important part of the equation.

Even in companies with the most comprehensive fraud prevention policies, procedures, and controls, there will still be some level of fraud. Investigations are needed to thoroughly examine allegations and suspicions of fraud. They also play a deterrent role, as employees are less likely to engage in fraud if they know that periodic checks occur throughout the company.

It would be nice if fraud investigations became completely unnecessary, but that is not realistic. In companies with increasingly better anti-fraud controls, the need for reactive investigations should decrease. But fraud investigations should never be completely eliminated, because even the companies with the most effective fraud prevention programs will still have some instances of fraud to investigate. The hope is that incidents requiring a full-blown investigation will be decreased and that management can focus their best efforts on turning a profit instead of examining cases of fraud.

24 Sep

Prevention After Finding Fraud

After a company has experienced internal fraud and has investigated the situation, how do they address the issue of fraud prevention?

Moving forward after an internal fraud requires that management actually make good on promises to prevent future frauds. It is sometimes difficult to get management to make changes, because they view changes as another cost on top of the cost of the fraud and the investigation. But shoring up internal controls is necessary if the company really wants to improve after a fraud.

The wise members of company management are interested in remediation after an internal fraud is discovered, and often they look to the fraud investigator for guidance in this area. It makes sense to have someone well versed in fraud schemes help management make improvements for the future. Read More

06 Sep

What Happens After a Fraud Investigation?

After an internal fraud is discovered and fully investigated, a company and its employees must move forward. That might seem like a simple thing to do, but it is not always quite that easy. The financial blow of an internal fraud can be devastating. Employees have long-term memories that may not allow them to forget about the violation of their trust by someone who worked side-by-side with them or by someone who was responsible for their future.

The most obvious potential long-term effect from an employee theft is financial devastation. Companies lose something on the order of 4% to 5% of revenue to internal fraud each year. Imagine how many companies could be put out of business with a fraud of that size.

The first step to moving beyond an internal fraud, especially a significant fraud, is repairing the financial damage. Often, cash reserves have been depleted and debts have mounted while the dishonest employee was filling her or his pockets. A plan to repair the company’s finances should be established quickly. Read More

28 Aug

Why Is It So Easy to Commit Fraud?

It sometimes seems like it’s easy to commit fraud at work. Why is that so?

One of the main reasons is that employers must put trust in their employees and give them access to data and assets. It’s also important to remember that employers give responsibility to people who are trusted. If someone wasn’t deemed trustworthy enough to take money to the bank, she or he wouldn’t be handed the bank deposit. That trust inherently means that opportunities to commit fraud are handed to employees each day. Read More