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Controls and programs to minimize fraud

fraud, controls, audit, accountingIn today’s environment, companies are often the target for fraud. In order to minimize threats, your company should have an effective system of programs and controls in place. These programs and controls work by discouraging individuals from performing fraudulent activities.

The following conditions are generally present for fraud to occur:

  1. Incentive/pressure. Relates to finances, personal habits, bad attitude towards your company and/or reporting pressures to manipulate financial results due to meeting quotas, goals or debt covenants.
  2. Opportunity. Relates to there being weak or no controls in place which allows fraud to be committed easier. In these cases, controls can be overridden, or a lack of controls allows fraudulent activity to go on for a long period of time before being discovered.
  3. Attitude/rationalization. Relates to people’s morals. People who have good morals find it hard to lie, cheat or deceive without feeling remorse. People with poor morals have a greater chance to rationalize or make excuses for fraudulent activities.

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To adequately combat fraud, programs and controls should be in place to reduce these conditions.

Prevention

This prevents opportunities, or minimizes the pressures that motivate someone. Examples of preventative controls could include:

  1. Background checks on people being hired into positions that require trust, and performing them periodically.
  2. Researching employee’s education, employment history and preferences.
  3. Keeping blank check stocks locked up.
  4. Adequate segregation of duties (having an employee not related to accounts receivable open the mail and/or prepare deposit slips).
  5. Capital budget approval for purchasing assets.
  6. Providing ethics and anti-fraud training to employees.

Deterrence

This prevents fraud from occurring through the threat of receiving sanctions such as a zero-tolerance policy. Other examples of deterrence could include:

  1. Firing or prosecuting the person committing the fraud, or making employees aware of the consequences.
  2. Adequate segregation of duties (having an employee not related to accounts receivable or accounts payable perform bank reconciliations).
  3. Informing employees that a financial statement audit is performed and the timing of fieldwork.

Detection

This is often the most difficult due to most fraud involving hiding activities through forging documents or collusion with multiple employees. Examples of detection could include:

  1. Comparing periodic financial information (month-by-month) to identify anomalies in trends.
  2. Establishing a hotline or whistleblower program.
  3. Periodic job rotation or mandatory vacations for key employees that work over common areas where fraudulent activities could occur.

Patrick Herrera, CPA