Fraud!

Randomly, I took a course on forensic accounting yesterday. To me it seems clear that we spend far more time on remediation (such as forensic accounting) than on prevention. Which is the way of the world, it seems. Of course we put in place processes and procedures to avoid fraud in our acct'g departments, but they seem compulsory, not part of some fine grained anti-fraud strategy/framework that is a priority. I guess that should remind me to take a look at our fraud prevention. Maybe it should include some training :)...

As part of my graduate education I had to take a Forensic Accounting and Fraud Examination class. I enjoyed it. I enjoyed it so much I gave thought to trying to go into that specialized field of auditing. I gave thought to it because I enjoy the white collar crime mysteries that have been perpetrated through the last century, whether fact or fiction, being shown in movies or newspaper headlines. It is such a puzzle that seems exciting to figure out. Unless you are investigating certain "organizations", then it may get a little sketchy. The fraud diamond and fraud triangle were interesting theories I got to study for research projects.

The trick to fraud and, I've seen a fair amount of low level fraud, is not to put anything in writing (or on the GL). Thus, forensic accounting is somewhat futile. It becomes a game of "he said, she said" with insufficient proof to pursue restitution. Besides, there is little downside to fraud. The perps may be let go but they are rarely prosecuted. And, even when they are, the penalties are not draconian. Just look at Michael Milken today. You'll have to forgive me for being skeptical. ;-(

Asset handling controls are an important factor that I don't see anyone discussing here. As we all know, if a single individual is attempting to perpetuate fraud on an organization, basic controls should be sufficient to detect their efforts. Especially if you have documented procedures for the handling and transfer of assets among employees. Does your company have written procedures and do you follow those procedures. It is very easy to put cash handling procedures in place, but if you don't hold managers accountable for ensuring employees follow those procedures, then gaps will eventually show up and the not-so-honest employees will find a way to exploit those gaps. The issue I have run into in the past is that some employers/managers do not want to rock the boat with their star managers/employees. So, when that person begins to complain about following these "stupid rules" that "do not make sense", or about the company not trusting them because those accountants are always looking over my shoulder, that is an indication to me that it is time to focus more on that individual. I am interested in hearing others thoughts on detecting the group of employees who are colluding to defraud the company, or its customers.

It may be tedious, but one of the best ways to detect outgoing monetary fraud is to review all canceled checks and debits from the bank statement. Unusual amounts, vendors you don't recognize, addresses that don't make sense or unusual endorsements can tip you off. If you still receive paper checks with your statement and you did not open the statement, make sure you verify all of the checks are still there.

Wilst Fraud may be a dreaded word, a far bigger problem for Finance chiefs is undetected accounting errors. Compared to 20 years ago companies are far larger and more globalised and consequently more complex. No accounting software can eliminate all errors and these days, with the fashionable financial shared service centre regime, accounting personnel are often completely detached from the business. Accountants thus rely even more heavily on what business people tell them so that they can make accurate accounting entries. Whilst it is true that fraud may occur at this level, it is far more likely that imperfect communication will lead to errors of judgement or simple booking errors that don't always get picked up. Why don't they get picked up ? because there are fewer and fewer people in finance departments these days to pick them up. The Sarbanes Oxley act was designed to renforce internal controls but CEO's still relentlessly drive down finance and admin costs to the point where internal controls break down. Even expensive ERP software will allow erroneous journal entries and CFO's need to convince CEO's that finance must be adequately staffed.