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Fraud can be difficult to find, even for a trained auditor who’s searching for it. More than half of the companies in the United States have had some sort of fraud in the last two years. The average amount of the fraud was $150,000. The average scheme lasts 18 months before detected. So, why isn’t it easily detected?
Evidence of bribes and kickbacks aren’t usually in the company’s records, but rather in some third-party or accounting records. The problem of finding fraud is compounded by many factors including:
Standard audits review only selected samples, not 100 percent of the records or transactions. The number of items reviewed depends on several variables, including the size of the company and the total number of transactions, but typically the number reviewed is less than 1 percent.
Items selected for review may be chosen at random, or by size and materiality. In many cases, transactions below a certain dollar amount aren’t even looked at because they aren’t considered “material” or important enough to consider.
The analytical procedures used by auditors concentrate on consistency between years. They look at the financial records for the current year and compare them to the prior year, looking for trends or inconsistencies. If someone in the organization had their fraud scheme in place last year and it’s still in place this year, it may not be caught.
So, what’s a business owner to do? Rather than try to catch the scammers after the fact, a better approach is to create an environment that’s hostile to folks with fraud on their minds. Companies should develop strong internal controls that make it harder to commit fraud, and easier to get caught when they do. Company owners can develop an internal audit function or other screening process to review records on a regular basis, and establish regular testing procedures.
One of the simplest controls is a two-signature check system. While requiring two signatures requires a bit more time, this basic protection goes a long way towards reducing fraud.
Of course, one of the best ways to avoid being defrauded is to be sure that you have employees who deserve your trust. Business owners can increase their confidence level by conducting thorough background checks on key employees, vendors and customers. That includes all of the accounting personnel ... anyone who deals with the money.
With some improved systems in place and a higher level of vigilance, business owners can feel more confident that their finances are fraud free. If you would like help developing or reviewing internal controls, please talk with your Rea associate or contact me directly at 614-464-3343 or heinz.ickert@reacpca.com.
Heinz Ickert, CPA, CFE, CVA, CM&AA (Shareholder, Rea Strategic Solutions)
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