fraud detection

Family Lies: Fraud in Family Business

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Trust is inherent in any good business. We continuously place trust in our employees and in those with whom we do business. But that trust which is so necessary to the operation of a business is also the impetus for thieves to profit.

It is unfortunate that fraud occurs when and where you least expect it. Blood may be thicker than water, but that doesn’t protect a company from theft by family members. In fact, it may be just that trust between family members that is exploited by a dishonest sibling, uncle or cousin.

Some fraud experts suspect that fraud occurs more often in family businesses than other businesses, and that the increased fraud risk is due to the trust factor. Family members put more trust in one another and therefore grant one another more access and opportunities for fraud. The controls in family businesses may be lax, particularly as they relate to the oversight of management’s activities. Continue reading

Audit Malpractice Defense: Four Key Issues

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When a major fraud is discovered in a company, one of the key targets of litigation is usually the independent auditors. Two well-publicized cases in which management or shareholders suing the auditors after fraud was uncovered involve Koss Corp. (auditors Grant Thornton) and Navistar International Corp. (Deloitte & Touche).

Plaintiffs look to the auditors for potential recovery since the auditors typically have deep pockets and large insurance policies. Auditors (and their attorneys) need to know how to defend themselves in these suits.  Naturally, the auditors recognize that audits are supposed to provide reasonable assurance that the financial statements are fairly stated. Continue reading

Koss Corp. Fraud: Defending Grant Thornton? No.

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fraudI have been criticized for “defending” Grant Thornton, the auditors of Koss Corp, which has suffered a fraud loss of at least $31 million at the hands of the company’s Vice President of Finance, Sue Sachdeva. In fact, my comments relating to this case are not a defense of Grant Thornton, in the least. They are meant to point the finger squarely at Koss management, which is wholly responsible for this fraud.

I’m not saying that Grant Thornton did a bang-up job when it comes to Koss. I couldn’t possibly know that without knowing exactly how the fraud was carried out (Koss still hasn’t said) and without seeing GT’s workpapers and taking a good look at what they actually did. What I am saying is that audits have so little usefulness and are so awful at detecting fraud, that it’s a given that a woman like Sue Sachdeva would easily be able to get away with a massive theft. Continue reading

An average company wasted $1.7 million on SOX 404 Compliance last year

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Financial Executives International polled companies for the 7th year in a row to determine how much it costs to comply with Section 404 of the Sarbanes-Oxley Act. This year, they talked to 185 companies with average annual revenues of $4.7 billion.

The total average cost of compliance was $1.7 million in 2007. This is a decrease from the prior years.

The survey also asked “accelerated filers” (companies with market capitalization above $75 million) about their audit fees for 2007. The total audit fees for these companies averaged $3.6 million, up a bit from 2006. Continue reading

Why Audits Fail to Find Fraud

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I am reading Cynthia Cooper’s book, Extraordinary Circumstances, which documents her experiences uncovering the massive fraud at WorldCom. I want to finish reading the book so I can write a proper review here and elsewhere. But I admit I’m having a hard time finishing the book due to all the other demands on my time…

Nonetheless, I wanted to share this passage from the book because it illustrates so perfectly the main reason why audits fail to find fraud: Those committing fraud know how to hide it from the auditors. Because of that active concealment, there is little chance of the auditors finding the fraud. Continue reading