Armanino Blog

Fraud May Come From Those You Least Suspect It

by Paul Peterson
October 06, 2010

When finding ways to increase an individual's income to make ends meet proves difficult, a convenient way to relieve financial stress is through fraud.

The pure longevity of the recession is leading many employees, whose savings are now depleted, to commit fraud against their companies. Management can be very quick to place trust in their employees, especially long-term ones whom they have known for a while and built a relationship with. Ironically, these employees, often times, are the first to commit fraud as they are in a position of knowing the company's control processes, and more importantly, how to get around them. Since there is already established trust in the employees from the owners, owners tend not to question these long-term employees.

Looking for Signs of Fraud

There are signs a company can look for regarding their employees, in order to detect potential fraud. One sign can be a change in the employee's lifestyle or demeanor. Shifts that occur that haven't happened in the past such as new cars or expensive vacations can be an indicator. Although harder to correlate directly to company fraud, changes in mood can also be a trigger. Stresses of a spouse losing a job, unpaid bills and a shift from happy to sad might be enough motivation and an indicator for an employee to attempt fraudulent acts. One example is a controller or accounts payable clerk no longer getting approval for certain expense payments or certain account reconciliations in order to hide the fraud.

Studies have shown, once a person starts performing fraud, they don't stop. The employee rationalizes they are owed this money either due to longevity with the company, the extra work they perceive they do or a sense of entitlement to it. Whatever the case, the fraud perpetuates, getting larger and larger as time goes on. Without effective internal controls and risk management processes in place to detect and mitigate fraud, companies may find they have a little less (and sometimes a lot less) cash at the end of the year.

Planning is Key

Foresight is the main way to plan and prepare for changes in the economy that might increase an employee's motivation to commit fraud. One major way to reduce the risk is to ensure effective processes and controls are in place. Below are steps a company can take to mitigate the risk of fraud from their employees.

  • Maintain awareness of changes in lifestyle or demeanor of employees
  • Perform and document a formal risk assessment of the company – evaluated and updated periodically
  • Implement controls to strengthen accounting procedures based on the formal risk assessment
  • Perform internal compliance testing of internal controls – examples include review of vendor listings, examination of vendor payments, testing a sample of cash disbursements and G/L postings
  • Employ a CPA firm to perform compliance and operational audits – these may include SAS 70 audits, internal control testing, operational reviews, etc.
  • Ensure whistleblower policies are in place; communicate often
  • Question employees with respect to knowledge or suspicion of fraud

Increasing the strengths of controls and procedures, like those listed above, will not only reduce the risk of theft but also increase accounting accuracy and operational efficiencies, ensure transactions recorded through the processes identified are accurate, and strengthen financial reporting.

Costs Associated

Risk assessment evaluation and documentation and internal compliance audits do require company hours and therefore accumulate payroll costs. External compliance costs fluctuate and can vary based on each company's needs and the extent of testing desired. However, the good news is, there are options for every company regardless of size, with a pricing structure that works for each situation. The price of not performing an evaluation could add up to more in loss of assets or investor/client confidence than the initial cost of establishing solid processes, especially in times of economic downturn where the motivation to commit fraud from an employee's perspective is far greater than when times are good.

October 06, 2010

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