Fooling the Auditors in 7 Easy Steps

Even with all of the publicity surrounding the issue of financial fraud in the last decade or two, most auditors, investors and other professionals still do not “get it” when it comes to detecting fraud. Traditional financial statement audits were never designed to detect fraud. The audit is simply a process by which auditors check the company’s math and application of accounting rules.

Fraud is rarely detected by financial statement audits because they are not designed to do so. Occasionally, fraud is detected by auditors, but they could increase their chances of finding fraud if they changed their audit procedures.

Read moreFooling the Auditors in 7 Easy Steps

Staying Independent in Fraud Investigations

I would like to think that most companies are committed to doing business honestly. They try to do the right thing, and when a problem is found, they try to correct it quickly.

Even when a scandal is looming, I hope most companies would want to find the truth as fast as possible and take appropriate action.

Even when a company is committed to fixing problems, however, management does not always do it the right way. This is particularly true when it comes to investigating suspicions of wrongdoing. There are many times when such an investigation must be done by an independent party in order for the company to be in the best possible position following the conclusion of the investigation.

Read moreStaying Independent in Fraud Investigations

Myths About Fraud

I wrote an article on these five myths about fraud nearly fourteen years ago. And really, nothing has changed. I’ve updated some of the facts and figures, but the concepts remain the same. These are some of the most common myths I see, and these traps are the reasons companies continue to become victims of expensive internal frauds.

1. Our company does not have an internal fraud problem.

While companies would like to believe they have good employees and adequate controls to prevent fraud, the fact of the matter is that half of all companies will be significantly affected by fraud. One survey estimates the average internal fraud will cost a company $150,000.

Companies cannot afford to ignore the risk of fraud and the likelihood that fraud is occurring internally. It is too expensive, particularly when one considers the fact that there are many indirect costs of fraud, including investigation and legal costs, employee attrition, and decreased employee morale.

Actively fighting fraud means implementing policies and procedures that prevent and detect fraud. Anti-fraud professionals who are experienced with the common methods of fraud can be invaluable to this process. Whether a company gets there with employees or outside consultants, it is important to secure company information and assets to prevent internal fraud.

2. Most people are honest and won’t commit fraud.

This is a dangerous approach to take to the business of fraud. It is true that most people are generally honest. But to rely on this instead of putting controls in place to prevent fraud is a big mistake.

Read moreMyths About Fraud

Identifying Fraud Red Flags

Would you recognize the clues that your client has been ripped off by one of its employees? Or would management conduct business as usual, blindly trusting their employees?

Companies make the mistake of not actively searching for fraud. They tend to trust their employees and trust the procedures in place to safeguard company assets.

It may be good business to trust employees and empower them to make real contributions to the growth of the company. However, it is not wise to turn a blind eye to signs that a trusted employee may be stealing.

Read moreIdentifying Fraud Red Flags

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 moreConducting Corporate Fraud Investigations

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.

Read moreDetecting Overrides of Internal Controls

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 moreFraud is Just Part of a Controller’s Job

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 moreA Simple Anti-Fraud Training Outline

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 moreManual Cash Disbursements and Fraud

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 moreLarge Data Sets in Financial Investigations