Focus on Fraud: 2016

One requirement in the auditing standards is to ask our clients, point blank, if they are aware of any fraud within the company. This requirement is for all entities undergoing a financial statement audit, whether they are a large publicly traded corporation, a small family-owned business, or even a not-for-profit (NFP) organization.

To me, the worst answer is not so much getting a response of “yes,” because let’s face it, we don’t get that response very often. What’s most disappointing is a shocked reply of, “Fraud could never happen here, we’re a charity!”

Unfortunately, history has proven time after time that NFPs are vulnerable to fraud.

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Do you find that you sometimes get so bogged down in the details that you lose sight of the big picture? You know – not being able to see the forest for the trees.

If you find yourself in that situation, one way out would be to borrow a concept from Stephen Covey’s 7 Habits of Highly Effective People: take the time to “sharpen the saw”. Take time out to renew your focus. Don’t get so caught up in the details of a task that you don’t realize that a more important and sustainable solution may be at your fingertips.

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This story, brought to us by irs.gov, illustrates a scheme that doesn’t often get a lot of attention, but it can provide fraudsters with an open door. In this case, the method used to cover up the fraud was to record automotive allowance payments to employees who were still listed as active in the accounting system, but who were no longer actually employed by the company. The payments were actually going to the fraudsters, and the amounts piled up after a while. A similar scheme can be used with vendors that are no longer used by a company, or even customers.

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The Accidental Fraud Detector

It is often said that hope is a wonderful virtue but a terrible strategy. The same can be said for hope as it relates to fraud prevention. I hope we hire the right kind of people.  I hope the controls we have in place are strong enough.  I hope the bank will catch anything unusual.  When hope is the major strategy, then you are leaving fraud detection to luck and happenstance.

In their Report to the Nations on Occupational Fraud and Abuse, the Association of Certified Fraud Examiners has consistently listed “accidents” among the methods that eventually caught an actual fraud. 

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Tone at the top is a very powerful fraud prevention tool, but it is also one of the most difficult to introduce into an ongoing business. Like many internal controls and cultural elements, the impact of tone at the top stretches far beyond detecting errors and fraud. A solid tone from the top executives can drive more efficient operations, better communication and, in many cases, improved operational results and profitability.

A prime example from the sports world

As the major league baseball season fast approaches, the Seattle Mariners are starting to demonstrate their tone at the top. Speaking as a (long-suffering) fan of the team,

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