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2003
A Primer for Brainstorming
Fraud Risks
DECEMBER 2003: Auditors are
required by SAS no. 99, Consideration of Fraud in a Financial Statement
Audit, to conduct a “brainstorming” session in every audit. Its purpose
is twofold: to consider fraud risks that may be present and to emphasize the
importance of professional skepticism throughout the entire audit process.
Key members of the audit team—from the lead partner or manager in charge of
the engagement all the way down to new staff—meet during the planning stages
and during the course of the audit to exchange ideas about how and where
they believe the entity’s financial statements may be susceptible to
material misstatements due to fraud and to discuss how management could
perpetrate and conceal fraudulent financial reporting or misappropriate
assets. This article will discuss how audit team leaders can avoid the
pitfalls inherent in brainstorming sessions and employ the best practices
for maximizing the benefits. (Read
more...)
The critical role of ethics
DECEMBER 2003: THE BUSINESS COMMUNITY IS MORE than familiar with the financial collapses of
Adelphia Communications Corp., Tyco International Ltd., Global Crossing,
WorldCom Inc., FINOVA Group Inc., Enron Corp., and HealthSouth Corp. Each
company failed amidst allegations of financial mismanagement, poor
decisions, and a lack of oversight. But the reality is that the tangible
aspects of financial collapse begin with a severe erosion and eventual
ruination of corporate and personal ethics. In other words, companies
collapse ethically long before suffering financial demise. (Read
more...)
Preventing fraud
by conducting background checks
NOVEMBER 2003: Employee fraud is a
considerable problem for today's businesses. Consider the following examples
of fraud that could have been avoided had the employer conducted a diligent
background check before hiring these fraudulent individuals. (Read
more...)
Trust is not an internal control
OCTOBER 2003: We trusted our finance director;
how could she steal from our organization?" This is an all too common lament
after a nonprofit organization uncovers embezzlement. Fraud studies show
that, given a change in personal circumstances, such as need or opportunity,
or a change in beliefs and perceptions, a high percentage of people will
steal. Given the statistics and the fraud stories, it's important to
understand why internal controls, which decrease a nonprofit's vulnerability
to fraud, are so important. Trust, unfortunately, is not among them. (Read
more...)
Expanded guidance for auditor fraud detection responsibilities
JUNE 2003: This article summarizes the
provisions of SAS No. 99. Consideration of Fraud in a Financial
Statement Audit, which is effective for audits of financial statements
for periods beginning on or after December 15, 2002, with an emphasis in
the newly introduced provisions. (Read
more...)
Accounts
deceivable: How to detect and prevent fraud
Effective internal controls are the first
line of defense against fraud for firms of all sizes. But small
businesses, which usually focus on product development, marketing and
sales, are particularly vulnerable.
Fortunately, there are proactive steps a
small business owner may take to help reduce the risk of fraud.
Conducting a fraud risk assessment and testing controls and transactions
are ways a business owner may prevent or detect fraudulent activity. (Read
more...)
Management Is Responsible, Too
APRIL 2003: The audit standard issued by the AICPA
auditing standards board (ASB) in October 2002—SAS no. 99, Consideration
of Fraud in a Financial Statement Audit—does something no audit
standard has ever done. It contains a document titled Management
Antifraud Programs and Controls: Guidance to Help Prevent, Deter, and Detect
Fraud, which challenges corporate management to be equal partners with
auditors in creating an environment that neither condones, nor is conducive
to, the existence of illegal activities. (Read
more...)
How
to Screen Job Applicants to Avoid Potential Employee Fraud
MARCH 2003: According
to the Association of Certified Fraud Examiners (ACFE), an
estimated 6% of revenues were lost in 2002 as a result of
occupational fraud and abuse. Applied to the U.S. Gross Domestic
Product, this translates to losses of approximately $600 billion,
or about $4,500 per employee. The losses can be particularly
devastating for small businesses, where the average scheme amounts
to a loss of $127,500.
The frightening part is that
many of these perpetrators don't appear to be hardened criminals; they don't
seem much different from the rest of us. In his book, Occupational Fraud and
Abuse—How to Prevent and Detect Asset Misappropriation, Corruption and
Fraudulent Statements (Obsidian Publishing, 1997), Joseph T. Wells, CFE,
CPA, Chairman of the Association of Certified Fraud Examiners, writes, "Few
people begin their careers with the goal of becoming liars, cheats and
thieves. Yet that turns out to be the destiny of all too many." (Read
more...)
Auditors’ Responsibility for
Fraud Detection
JANUARY 2003: Auditors will enter a much expanded arena of
procedures to detect fraud as they implement SAS no. 99. The new standard
aims to have the auditor’s consideration of fraud seamlessly blended into
the audit process and continually updated until the audit’s completion. SAS
no. 99 describes a process in which the auditor (1) gathers information
needed to identify risks of material misstatement due to fraud, (2) assesses
these risks after taking into account an evaluation of the entity’s programs
and controls and (3) responds to the results. Under SAS no. 99, you will
gather and consider much more information to assess fraud risks than you
have in the past. (Read
more...)
2003:
The costs of inventory misuse are difficult to quantify. To many
individuals, this is not viewed as a crime, but as "borrowing." In
truth, the cost to a company from this kind of scheme may often be
immaterial. When an employee borrows a stapler for the night or
takes home some tools to perform a household repair, the cost to
his/her employer is negligible, as long as the assets are returned
unharmed. (Read
more...)
Managing Risk from the Mailroom to the Boardroom
2003: Few areas of corporate oversight are more important
these days than the evaluation of the organization’s ability to
manage risk. However, risk and control are virtually inseparable —
like two sides of a coin — meaning that risks first must be
identified and assessed; then managed and mitigated by the
implementation of a strong system of internal control. ( Read
more...)
Ten Tips for
Preventing Corporate Fraud
Even before corporate scandals made
headlines, American companies were waging war against fraud. Not
counting the impact of Enron, WorldCom and other stricken
companies, annual fraud losses were topping $600 billion, according
to the Association of Certified Fraud Examiners’2002 Report to the
Nation on Occupational Fraud and Abuse.
Despite tough economic times and seemingly
rampant misconduct, now is not the time to panic. There are simple,
practical steps you can take to protect your company from fraud. (Read
more...)
2002
Keep Ghosts Off the Payroll
DECEMBER 2002: Turner, a payroll specialist for a large Florida nonprofit
organization, was a sick man. Most employees who steal do so out of greed,
but Turner had a different motive—he was HIV-positive and needed expensive
drugs to control the disease. Complicating matters, he hid his illness from
his employer and health insurer. Over the course of two years, he embezzled
$112,000 to cover his medical costs. Although Turner needed the extra cash,
there were alternatives to stealing. But he couldn’t bring himself to reveal
his sickness and ask for help. (Read
more...)
NOVEMBER 2002:
The following listing of selected indicia of fraud is presented for
illustrative purposes only and is not exhaustive. The conditions
listed do not necessarily indicate the existence of fraud; rather,
each is an indication that fraud may be present. Many times
legitimate activities or other reasons may explain the indicia of
fraud. For example, an employee enjoying a lifestyle not readily
explained by his or her current earnings may have previously
inherited a substantial sum of money. As a result, the CPA should
exercise appropriate caution in forming opinions before an adequate
investigation. Even then, the CPA should avoid offering opinions
about guilt or innocence because the ultimate conclusion of law is
a matter for the tier of fact. (Read
more...)
NOVEMBER 2002: Fraud threatens the ability of agencies and councils to carry
out their functions. It is increasingly important that they properly respond
to the threat of fraud.
This
checklists publication is a companion to the ICAC publication Fighting
Fraud: Guidelines for state and local government. Although using the
checklists on their own will help you to fight fraud in your organisation,
the greatest benefit will be obtained by also reading the main publication.
The
checklists cover:
Those
responsible for the efficient and effective management of all government
organisations should read the guidelines and use the checklists to examine
their own fraud risk management arrangements. (Download
checklist)
To Cure Fraud, Start at the Top
OCTOBER 2002: Those
dethroned execs now doing the perp walk employed a slew of scams to
siphon big money out of companies and investors, including
self-dealing transactions, off-the-book partnerships, and company
loans that they never intended to repay.
The reasons
they were able to defraud companies and investors were surprisingly
few, however. Boards were overly cozy with management. The
fast-and-loose corporate culture of the 1990s boom lacked
sufficient controls. And do-or-die pressures to meet unrealistic
financial goals made it easy for some execs to rationalize putting
ethics aside. (Read
more...)
Before you hire, do a background check
OCTOBER 2002: Suppose you are an employer who has undergone three weeks of
grueling job interviewing. You've finally whittled the list down to
two excellent candidates, both of whom received glowing reports
from at least one former employer. Ditto for their personal
references. All that's left to do is make the decision, right? Not
so, says Toronto-based human resources consulting firm Infocheck
Ltd. – that is, not if you want to avoid possible disaster further
down the road. (Read
more...)
Fraud in foreign operations: is fraud lurking in your
organization's foreign subsidiaries? Ten warning signs can help
auditors determine what to look for and where the risks may lie
AUGUST 2002: THE NEED FOR
MULTINATIONAL CORPORATIONS TO monitor, prevent, and detect
suspicious activities is perhaps greater now than ever before. The
proliferation and widening scale of financial-statement fraud, as
well as increasing corruption in organizations worldwide, demands
the attention of all firms, but especially those that extend their
operations beyond national borders. Multinationals are particularly
vulnerable to fraudulent activity, as opportunities for abuse can
increase when subsidiaries are maintained abroad. (Read
more...)
Beyond Traditional Audit
Techniques
JULY 2002: Internal auditors don’t just audit control
activities, they also monitor a company’s risk profile and play a key role
in identifying areas to improve risk management processes. However, if they
don’t completely understand the risks of the business, internal auditors can
perform only traditional checklist tasks. At
California Federal Bank (Cal Fed) we helped our internal audit team
transform itself into a catalyst for change as a key risk adviser. Our
experience—as department head and audit manager—in taking an enterprise-wide
view and adopting a more progressive approach to audits may serve as a model
for other internal auditors to use to become a cornerstone of risk
management in their own companies. (Read
more...)
Responsibilities defined: do you know who's accountable for fraud detection
in your company?
JUNE 2002: OUR OF THE COMPANY'S
auditors happened to arrive at a meeting in the general auditor's
office before any of the other participants. Bob Anderson, the
general auditor; Sue Kirby, the eastern regional audit manager;
Juan Williams, the manager of corporate audit, and Ruby Myers, the
manager of international audit, fell into a conversation about the
recent, well-publicized events that had shaken the investment and
audit communities.
"The media is filled with horrendous stories
of companies committing fraudulent financial reporting. Our audit committee
meets in three weeks," Bob said, "and the committee members are concerned.
In the last audit committee meeting, they raised questions about whether we
actually did audit work that would detect fraudulent financial reporting." (Read
more...)
Let Them Know Someone’s Watching
MAY 2002: The recent failure of Enron—even though
fraud charges have yet to be proven—has renewed the hue and cry from
Congress, regulators and the investing public: Why can’t auditors catch
these problems?
The answers run the gamut: Auditors lack independence from
their clients, the audit process is not designed primarily to detect fraud,
the number of audit failures is minuscule compared with the number of
audits, it is not possible—because of collusion—to detect all material
frauds. (Read
more...)
Preventing
employee fraud by minimizing opportunity
MAY 2002: As defined by the Association of
Certified Fraud Examiners (www.cfenet.com), employee fraud entails the use
of one's occupation for personal gain through the deliberate misuse or theft
of an employer's assets or resources. Most businesses do not realize that
employee fraud can be a serious threat to business profitability. (Read
more...)
Occupational Fraud: The Audit as
Deterrent
APRIL 2002: There’s good news to be had: Audited companies suffer less
severe fraud losses than unaudited ones, and the overall rate of
occupational fraud hasn’t changed much in the last six years. Those
conclusions come from the “2002 Report to the Nation on Occupational Fraud
and Abuse,” issued by the Association of Certified Fraud Examiners (ACFE).
From actual case studies taken from the report, auditors and their clients
will learn the methods used by employees and insiders to commit occupational
fraud and what can be done to better detect and deter these offenses. (Read
more...)
Root Out Financial Deception
JANUARY 2002: Employees and others who commit fraud have long relied on
management’s inability to see what’s going on right under their noses. Why?
Because it has been too difficult and expensive to sift through the enormous
volume of business transactions taking place each day. Too often the
intensive record-screening necessary to detect improprieties slows business
processes and consumes funding and staffing. At some point, the “cure”
becomes worse than the “disease.” (Read
more...)
2002: Developing an
understanding of the various factors that contribute to the risk of
fraud is only the first step in a fraud prevention strategy.
Following this, it is necessary to implement policies that will
help to reduce the threat.
Some of the
measures that can guard against the threat of fraud were explained
previously in this chapter. Consider what is perhaps the main, and
certainly the most common, prevention tool: a good system of
internal controls. (Read
more...)
Appendix to SAS No. 99, Fraud Risk Factors
2002:
This appendix contains examples of risk factors discussed in
paragraphs 31 through 33 of the Statement. Separately presented are
examples relating to the two types of fraud relevant to the
auditor's consideration-that is, fraudulent financial reporting and
misappropriation of assets. For each of these types of fraud, the
risk factors are further classified based on the three conditions
generally present when material misstatements due to fraud occur:
(a) incentives/pressures, (b) opportunities, and (c)
attitudes/rationalizations. Although the risk factors cover a broad
range of situations, they are only examples and, accordingly, the
auditor may wish to consider additional or different risk factors.
(Read
more...)
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