|
2001
Irrational Ratios
- The numbers raise a red flag
AUGUST 2001: Financial statements tell a story,” says accounting professor
W. Steve Albrecht, “and the story should make sense.” If not, it’s possible
the story is a fake. By standing far enough back from the numbers to get a
good picture of the client’s business, auditors frequently can detect signs
of financial statement frauds. Because the balance sheet, income statement
and statement of cash flows are interrelated, such frauds can pop out when
certain numbers don’t make sense. The inescapable logic of the accounting
equation ensures that any major overstatement of assets or profits, such as
in the infamous ZZZZ Best case, will show up over time. (Read
more...)
…And
Nothing But the Truth: Uncovering Fraudulent Disclosures
JULY 2001: In a perfect world, the numbers in financial statements would
tell CPAs everything they need to know about a business. Numbers are
precise, definable and measurable. But in reality CPAs need words, too, to
tell them the whole story of an enterprise. That’s the sole purpose of the
footnotes to financial statements. Since fraudulent disclosures fall into a
number of recognizable patterns, knowing how these schemes work can greatly
help the financial statement auditor detect them. (Read
more...)
Ghost Goods: How to Spot Phantom
Inventory
JUNE 2001: Just a hint of inventory fraud can be a frightening
experience for an auditor of financial statements. Indeed, the list of
freakish inventory manipulations companies have committed over the last 50
years reads like a rogue’s gallery: McKesson and Robbins, the Salad Oil
Swindle, Equity Funding, ZZZZ Best, Phar-Mor. The tried-and-true schemes
these and other companies pulled have always given auditors nightmares. A
CPA who recognizes how these fraudulent manipulations work will be in a much
better position to identify them. (Read
more...)
Top 10 Reasons Why Fraud Is Increasing in the U.S.
MAY 2001: Everyone knows fraud occurs and is increasing both in frequency and
amount, but do you know why? Unfortunately, many people buy into myths about
fraud, which only helps perpetuate the problem. Where does your organization
stand with the top 10? (Read
more...)
Preventing and Responding to Fraud and
Misuse of Assets in a Nonprofit Organization
MAY 2001: During the recent 39th annual Risk
and Insurance Management Society (RIMS) annual conference held April 29-May
3rd in Atlanta, GA, a panel-style workshop on the topic of "Fraud" was held
as part of the annual Nonprofits Industry Session. Attendees included risk
managers from large secular and religious nonprofit umbrella organizations.
The session was led by William Chapin, Director of Risk Management for the
Roman Catholic Diocese of Rockville Centre.
In his introductory remarks, Chapin emphasized
the importance of considering the legal, internal control, and
resource-related aspects of fraud and fraud prevention. More than half of
the session participants reported personal experience coping with the
aftermath of fraud in their nonprofit organizations. Chapin characterized
fraud as "pervasive" and often "accepted" in American society, noting that
systems of control provide "reasonable assurances," not absolute controls or
protections against theft. (Read
more...)
Using fraud
assessment questioning to detect fraud
APRIL 2001: Ask the Right Questions, Interpret
the Answers
The increasing opportunity for employee fraud
is a significant problem for all businesses. Fraud is often discovered
through tips or complaints from individuals-most employees are willing to
reveal fraud if asked the right questions. Fraud assessment questioning
(FAQ) is a technique that CPAs can use to uncover problems and determine
where to start looking for fraud. (Read
more...)
White-collar grime prevention
JANUARY 2001: Let me start by stating the
obvious: In the absence of capable guardians (or regulators) there is
usually a presence of financially motivated offenders. These fraudsters
operate due to greed, their hunger for power, feelings of dissatisfaction,
unchallenged excuses and their increased potential for commercial migration
(whether it be real or in the virtual world). Between the risk of
white-collar crime and the actual incidence of the crime, falls the shadow
of how likely are these risks to materialise and is the probability thereof
managed? (Read
more...)
Prior 2001
To catch a crook
AUGUST 2000: Commercial crime is an
inevitable cost of doing business anywhere in the world today and
South Africa is no exception. What assistance is available to
identify and investigate white-collar crime? How can the risk of
becoming another corporate victim be prevented?
In this article we discuss managing your risk
of exposure to commercial crime and in particular the need to make your
organisation a “hard target” and to raise the level of fraud awareness
amongst employees and other stakeholders. (Read
more...)
Is Your Company Managing Its Risk?
JANUARY 2000: Every public organization, regardless of
size, should have some type of internal auditing process to help it manage
enterprise-wide risk. Corporate fraud cannot be taken lightly. Management,
boards of directors and
audit committees should consider the questions presented below and quickly
take steps to convert any “no” answer to a “yes.” (Read
more...)
A Fistful of Dollars
The best fraud prevention efforts will
concentrate on increasing an employee's perception of being caught.
AUGUST 1999: Although some people think
accountants don't have a sense of humor, the branch manager of a New
Orleans-based consumer finance company might beg to differ. He saw his life
change recently when he inadvertently ran into the company's internal
auditor while the two men were shopping one weekend. Without cracking a
smile, the auditor quipped that he was pulling a surprise audit on the
manager's branch first thing Monday morning. The auditor was only joking,
but the manager never realized it--perhaps because he had a guilty
conscience. He spent the rest of the weekend stewing. Finally, on Sunday
night he cracked. He called the company's president at home and confessed
that he had been stealing thousands of dollars from the company's bank
deposits and faking the paperwork to cover it. He was immediately fired,
although he was never prosecuted.
Internal fraud is a growing problem that costs
corporate America an estimated $400 billion a year, according to the most
recent survey of fraud examiners by the Association of Certified Fraud
Examiners (ACFE). But it is difficult to pin down because it can be carried
out through an endless array of schemes and individual transactional losses
may be small. (Read
more...)
Auditing Inventories—Physical Observations
JULY
1999: The
inventories of most commercial entities, especially those of manufacturers
or distributors, are material to their financial statements. By its nature,
accounting for inventories is complex and generally involves a great deal of
detail and is therefore susceptible to inadvertent errors. For similar
reasons and the fact that auditors test only a portion of the inventories,
there exists more than a low risk of manipulation when management is
disposed toward financial statement fraud. (Read
more...)
Baiting the hook - fraud
detection
JUNE 1999: Untangling "small-fish" frauds can
sometimes result in huge catches for the organization.
"I want you to take me seriously," said Erika
Nichols, the Marketing Manager for Direct Sales Insurance. "I know there is
a thief in our organization." Erika was involved in a heated discussion with
the General Auditor for Direct Sales, Art Pollard, whom she had asked for
help. (Read
more...)
A Comprehensive Structure to Help Analyze, Detect and Prevent Fraud
JUNE 1999: Analyzing fraud merely by its
detection and prevention elements can lead to two fundamental weaknesses:
structure and predictability. Fraud's cyclical nature, coherent elements and
direction imply that even partial detection, via professional skepticism as
SAS No. 82 describes, can uncover all of its drives, intents, actions and
objects. Moreover, an actual fraud event, as an effect with circumstantial
causes, renders fraud predictable by projection (the macro cause) and by
similarities among fraud cases (the micro cause). The proposed comprehensive
structure, encompassing intentional and unintentional irregularities, can
help contain and prevent fraud even at its inception stage. To demonstrate
how the comprehensive structure can help explain fraud's intricate elements,
we analyze seven prominent fraud cases into their cyclical components and
their implications to independent auditors. (Read
more...)
Best practice in fraud prevention
DECEMBER 1998:
Strategies and programs which have been devised to prevent criminal fraud
perpetrated against both individuals and organisations are considered. The
paper examines eight areas: fraud awareness and education; management of
fraud control; personnel monitoring; transaction monitoring; improvements in
personal identification; counterfeiting prevention; computer systems
monitoring; and legally based deterrence. (Read
more...)
Establishing a screen of defense - employee screening to deter fraud
AUGUST 1998: Failing to investigate
the backgrounds of job candidates can be an open invitation to
fraud.
Sue, the internal audit director for a
medium-sized manufacturing company, was very frustrated. "I just met with
our human resources department," she told George. "We talked about the
possibility of screening job applicants for positions in our company."
"You proposed candidate screenings to HR
several months ago," said George. "Are you still trying to convince them
that it's the right thing to do?"
"I certainly am," she replied, "but the HR
director refuses to accept that screenings could be beneficial. He's afraid
that they will be considered a privacy violation and the company might be
sued." (Read
more...)
Wanting to find fraud. (expert fraud detection
beginning with internal audit department)
FEBRUARY 1998: Internal auditors' functions
include the identification of potential problems including potential
fraud. When indications of fraud are becoming
apparent in an audit, internal auditors should immediately act rather than
succumbing to the temptation of rationalizing exceptions in audit working
papers. Common indicators of fraud include missing
documents, accounts which have not been reconciled, and so-called stale
items in reconciled accounts. This is demonstrated in an example using a
fictitious company. A former employee of ABC Insurance Co requested help
from the company's auditor regarding problems at XYZ, where the employee
worked at present. XYZ had an excellent audit staff but had experienced
cases of fraud which had not been earlier detected. How ABC
auditors assisted XYZ in detecting fraud
is discussed. (Read
more...)
Screening for fraud - screening out potential problem employees
OCTOBER 1997: The mistakes and oversights
that lead to fraud often begin with the hiring process. Many companies
don't have even the most basic controls in place to ensure a sound
employment selection process, as the following scenario reveals. (Read
more...)
Internal Control Checklist
SEPTEMBER 1997: An effective internal
control system enables you to manage significant risks and monitor the
reliability and integrity of financial and operating information. It
also ensures that the audit committee acts as a powerful and proactive
agent for corporate self-regulation. The Committee of Sponsoring
Organizations of the Treadway Commission developed the following
questions to help senior executives and directors gain a better
understanding of their organizations control systems. (Read
more...)
Getting managers involved - fraud prevention
JUNE 1997: Enough is enough!" the CEO exclaimed. "This is the third month
in a row where you two have briefed me on misconduct involving
long-term managers at a major subsidiary. What can we do to stop
this?"
The security director and audit director both knew the answer
but weren't sure the CEO wanted to hear it. Finally, the security
director spoke up. "When I worked at another company, we were often
faced with the same dilemma. How could we raise fraud awareness
among the managers without sounding as if we didn't trust anyone?
We presented a series of short programs on fraud prevention at
in-house conferences. Each program stressed effective steps to head
off wrongdoing and included suggestions on early detection and
proper handling. (Read
more...)
The unthinkable - encouraging employees to participate in designing
internal controls
Would any thinking internal actually
encourage employees to help design internal controls?
Although internal controls are still the best
way to eliminate opportunities for fraud in the workplace, there are too
many times when internal controls simply don't work. One simple explanation
is that employees often balk when their routines are disrupted by "outside
decree" and may even turn their attention to circumventing the controls.
Battle lines are drawn, and the memos scream back and forth across no man's
land.
Employees must submit to internal controls if
an organization is going to stamp out fraud; but if internal auditors can't
change other employees, they might try to engage them. In other words, they
might consider soliciting input from the end users when developing controls
to eliminate fraud. (Read
more...)
Reducing the cost of fraud
FEBRUARY 1994: In today's competitive
environments, no organization can afford the high costs of not dealing with
issues of fraud and fraud deterrence.
Research on fraudulent behavior indicates that
it is linked with a combination of three factors: (1) a "non-sharable"
pressure, (2) a perceived opportunity; and (3) some way to rationalize the
behavior as acceptable. Take the case of Jerry Watkins. (Read
more...)
Handbook on Fraud Indicators for Contract Auditors
1993: This handbook is issued to
increase auditor awareness of fraud indicators. While the emphasis
of the handbook is toward contract auditors, the information may
prove useful for all auditors. The 1988 revision to the Government
Auditing Standards, issued by the Comptroller General of the United
States, requires tests for compliance with applicable laws and
regulations. The auditing standards require the auditor to design
steps and procedures that provide a reasonable assurance of
detecting errors, irregularities and illegal acts that could
materially affect the financial-related audits. The 1988 revision
also significantly increased the auditor’s responsibility, from
remaining alert for fraud indicators to designing steps to
reasonably assure detecting irregularities and illegal acts. (Read
more...)
Thinking like a thief -
fraud auditing
AUGUST 1992: Financial auditing is a methodology for evaluating the accuracy,
timeliness, and completeness of the recordings of business
transactions. Fraud auditing, while borrowing many techniques from
financial auditing, is more of a mind-set than a methodology. It
relies on creativity (right-brain thinking) as much as it does on
reasoning (left-brain thinking).
Indeed, fraud auditing requires that the auditor think -- not
act -- like a thief. The auditor must ask: Where are the weakest
links in the chain of controls? How can controls be attacked
without drawing attention? How can a thief destroy the evidence of
his attack? (Read
more...)
Fighting fraud
AUGUST 1992: At some point in their careers,
all professional internal auditors will probably have to deal with serious
incidents of fraud.
FRAUD IS ALIVE AND WELL. In the U.S., the
public started to recover from the shock of scandals involving defense
contractors, savings and loans, banks, and the stock market, only to be
greeted with the BCCI fiasco, elected officials bouncing checks, and
universities overcharging the government on research grants. These scandals
occurred when there has probably never been more money spent on controls and
ethics, and on external auditing and internal auditing.
No organization, institution, or
individual seems exempt from the ravages of fraud. And most
auditors will find that detecting and responding to fraud presents
one of the greatest challenges they will ever face. (Read
more...)
|
