Posted June 21, 2016 by Steve & filed under Blog Articles, Forensic Accounting, Fraud, Fraud Deterrence.
Serial crimes, such as murder and arson, have certain characteristics in common with fraud.
According to Certified Fraud Examiner David Anderson of the Philadelphia forensic account services firm of David Anderson & Associates, serial fraudsters tend to start out "small" and their initial crimes may occur in a hasty and sloppy manner.
As time progresses, he said, they learn from their "mistakes", and the crimes are better planned and better designed to avoid detection of their involvement in the crime. In addition, Anderson noted, the time period between incidents of the serial crimes may get shorter and shorter as their need for gratification gets stronger and stronger.
There may also be a sudden halt in the serial criminal's activities or an unusually long period of time between the crimes, he explained, that often is attributed to such factors as incarceration (for another crime), treatment or some other disruptive influence.
Anderson said the Controller, a month or two later, once again found herself short of funds for several credit card bills.
The cycle, he said, continued at shorter intervals and for larger amounts until she had 'borrowed' the full amount of petty cash and was unable to pay it back from her next paycheck. Her 'solution' to this problem was to submit phony expense documentation (such as copies of already reimbursed expenses and phony receipts obtained from the Internet) to cover the 'borrowed' amounts she was unable to repay.
Anderson, a Certified Fraud Examiner, said his company's investigation showed that over time, the amounts and frequency of the fraud grew until it was discovered. This pattern of growth in amount and frequency, he said, was fairly typical of other frauds the firm has investigated.
In another recent case, Anderson said one family member of a family-owned retail business began embezzling funds from customer invoices for which the customers paid cash.
Because the company had a manual cash register system, the family member removed both cash and the corresponding invoices from the deposit slips and invoices he provided to the accounting clerk who entered the information into the company's QuickBooks accounting system. He additionally hid the cash shortages by delaying payments to vendors (telling them that business was bad).
Because the family member in question was a member of the comp clubs at each of the four casinos at which he gambled, Anderson said he was able to obtain documentation of his daily cash winnings and losses from each casino. His embezzlement activities generally mirrored his gambling losses.
Posted June 13, 2016 by Steve & filed under Blog Articles, Forensic Accounting, Fraud, Fraud Deterrence.
Opportunity – the ability for fraudsters to carry out the misappropriation of cash or other company assets – is one of the three key elements necessary for fraud to occur, and it is an element that organizations often can eliminate by enacting strong anti-fraud controls as part of a comprehensive fraud deterrence program.
In its 2016 Report to the Nations, the Association of Certified Fraud Examiners (ACFE) found in almost 30 percent of identified fraud cases, the opportunity that allowed fraud to occur existed solely because the organization lacked the proper internal controls. In almost another 20 percent of fraud cases, the opportunity for fraud existed because of a lack of management review.
Strong internal controls work to safeguard assets, ensure reliable financial reporting and make the organization compliant with laws and regulations, Anderson said. Some of the more common internal controls include separation of duties (requiring more than one person be involved in processing and recording financial transactions); regular management review to provide oversight; and independent checks or audits, either with an internal audit department or external auditors to provide additional oversight, he said.
Reviewing monthly bank statements and monthly financial statements on a regular basis are critical factors of a strong management review process, Anderson added.
Overriding of existing internal controls, which was responsible for 20 percent of fraud cases. Fraud investigations indicate these situations occur when a more senior person, usually in management, persuades an employee to ignore or circumvent internal controls. For example, a manager may ask an employee to print a check for a dollar amount that requires two levels of approval without proving the approvals were obtained. Or an auto dealership employee may allow a customer to leave without paying for car repairs made by the dealership.
Poor tone at the top, a key factor in almost 10 percent of reported frauds. Fraud investigations show employees take their cues from their supervisors. If management engages in questionable behavior, such as overriding existing internal controls or running personal expenses through the company, it sends a message to the employee that such behavior is tolerated.
Strong internal controls, regular management review and a strong anti-fraud message that is delivered by word and by action all are important components of comprehensive fraud deterrence programs created by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley, he added.
In the coming weeks, Anderson will continue to share findings from ACFE's 2016 Report to the Nations, the results of a global survey conducted biennially to study the costs, schemes, perpetrators and victims of fraud. The Association of Certified Fraud Examiners is the world's largest anti-fraud organization, dedicated to fighting fraud through its more than 75,000 members in more than 150 countries worldwide.
Posted June 7, 2016 by Steve & filed under Blog Articles, Forensic Accounting, Fraud, Fraud Deterrence.
With the arrival of Memorial Day, another summer of fun and vacation has begun. Those employees with vacation homes at the shore or in the mountains will begin regular weekend visits. Work will slow down or fall behind as employees take vacations, and employers scramble to cover their vacant positions.
While summer is generally fun for all of us, it is especially fun for fraudsters, according to Certified Fraud Examiner David Anderson of the Philadelphia forensic account services firm of David Anderson & Associates. That fun, he said, comes in two distinct areas: Workplace Fraud and Vacation Fraud.
Management may relax fraud investigation and oversight as well as forensic accounting measures due to either employee vacations, their own vacations or both.
Management continues to exercise either an increased level of oversight or at least the same measure of oversight as it does the rest of the year.
In particular, the use of skimmers has increased. Skimmers are electronic data collection devices that are placed over ATM card slots, credit card slots and on credit card swipers. They have become smaller in size and less noticeable to the point that it can be difficult to ascertain whether or not a skimmer has been placed on the device you are using.
Last summer, Anderson was on vacation in Asheville, North Carolina. On the Sunday his family was leaving, he went to the ATM at a local bank and withdrew funds. Unbeknownst to him, fraudsters had placed a skimmer on the ATM machine. Anderson only learned of the theft of his debit card and PIN information on Monday night when he went online to check his bank account and noticed a strange charge made in Washington state approximately 12 hours after he had withdrawn funds from the ATM.
Anderson subsequently learned the fraudsters had used his debit card and PIN information to purchase an iPhone in Washington state. When he contacted Ashville bank officials the next day, they checked the ATM and found there was no skimmer on it. However, they later notified him they had had a number of complaints during the week about people who had used their ATM and had fraudulent charges appear on their debit cards.
In the future, when he is on vacation, Anderson said he will only use an ATM that is in a bank's lobby and only during normal business hours. He also said he will only use his debit card as a credit card to avoid entering my PIN number. In addition, he said he is determined to have a higher level of vigilance whenever he uses his debit or credit card out of town . . . and he strongly recommends others adopt this same practice.
Posted May 31, 2016 by Steve & filed under Blog Articles, Forensic Accounting, Fraud, Fraud Deterrence.
Performing a formal financial audit annually is thought by many to be the most effective means of fraud detection and fraud deterrence.
Less than four percent of all fraud is detected by a formal financial audit. In fact, nearly twice as many frauds are discovered by accident than by formal audit.
So what is the best way to detect and prevent fraud? You might be surprised.
The 2016 Report to the Nations from the Association of Certified Fraud Examiners (ACFE) shows tips are responsible for uncovering fraud more so than any other method. More than 39 percent of all frauds were exposed as the result of information provided by tipsters.
And who were the main source of these tips? By far, it is a company's own employees, the ACFE report said. A surprisingly high 52 percent of all frauds reported via tips came from company employees.
So how do you encourage employees to come forward? The best way is through the use of an anonymous tip hotline.
Companies do not have to set up the tip hotline themselves, Anderson said. Third-party companies will step into set up and operate the hotline for a reasonable fee and will maintain the employee's confidentially. In fact, having an outside party manage the hotline further assures employees their identity will not be revealed by something they say or by speaking with someone who recognizes their voice.
In addition to tip hotlines, the 2016 ACFE Report shows many companies also are providing mechanisms for receiving tips through e-mail and/or through their websites.
Companies that provide tip hotlines for their employees typically find both the duration of fraudulent activity and amount of the losses are reduced by 50 percent.
A tip hotline is an important component of a comprehensive fraud deterrence program that, Anderson said, can be created by a firm that provides forensic accounting services in Philadelphia and the Delaware Valley. Anderson also said he urges organizations to protect themselves by contacting a Certified Fraud Examiner to conduct a thorough fraud investigation at the first sign of suspicious activity.
Posted May 23, 2016 by Steve & filed under Blog Articles, Forensic Accounting, Fraud, Fraud Deterrence.
So you've been the victim of fraud.
You knew something was amiss. You hired a Certified Fraud Examiner. A thorough fraud investigation uncovered the fraud and identified the perpetrator. You fired the fraudster — or punished them internally — and implemented stronger anti-fraud controls and forensic accounting measures as part of your overall fraud deterrence program.
While the majority of organizations victimized by fraud do refer the matter to law enforcement, the number may be lower than you might think.
In its 2016 Report to the Nations, the Association of Certified Fraud Examiners (ACFE) – the world's largest anti-fraud organization, dedicated to fighting fraud through its more than 75,000 members in more than 150 countries worldwide – found that only 58 percent of fraud cases were referred to law enforcement. The remaining 42 percent were not. This finding represents a downward trend from each of the previous two Reports.
Of the cases referred for prosecution, more than 76 percent resulted in a guilty plea or a conviction. Only about two percent resulted in an acquittal. In most of the other cases, law enforcement declined to prosecute.
Almost 19 percent thought that referring the case to law enforcement and helping with prosecution would be too costly.
Anderson, a Certified Fraud Examiner and an ACFE member, strongly encourages companies, non-profits and government offices to refer fraud cases to law enforcement. He said he is particularly reluctant to advocate for internal punishment without criminal consequence.
He recalled a case in which a company controller who committed fraud was allowed to remain in his job by agreeing to repay the stolen money through regular payroll deductions.
After some time passed, Anderson was retained by the company to conduct another fraud investigation, which found that the controller was again defrauding the company in a variety of ways, including having instructed the payroll department to stop the payroll deductions designed to repay the previous fraud. The company terminated the fraudster, but again declined to prosecute.
"I have no doubt that today the employee is working at another company and perpetrating a fraud there," he said.
There also is a key benefit to your fraud deterrence efforts that comes from referring fraud cases to law enforcement, Anderson said.
Anderson recommends that every organization enact a comprehensive fraud deterrence program created by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.
If you require the services of a Certified Fraud Examiner or any other forensic accounting services in Philadelphia the and Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.
Posted May 16, 2016 by Steve & filed under Blog Articles, Forensic Accounting, Fraud, Fraud Deterrence.
Do you understand how they function on the job or the scope of their interpersonal relationships at work?
Do you know what personal challenges or difficulties they face at home?
If these questions are raising concern for you and the financial health of your organization, then maybe it's time to learn more. Understanding your employees is a key component to an effective fraud deterrence program.
In its 2016 Report to the Nations, the Association of Certified Fraud Examiners (ACFE) identified some of the more frequently occurring behavioral signs and personal situations that should raise red flags at companies, non-profits and government offices.
The report, a biennial global survey on the costs, schemes, perpetrators and victims of fraud, found that a key red flag is employees who live beyond their means, Anderson said.
Look, he said, for a significant change in lifestyle – a lower-level employee who suddenly starts driving a luxury car, wearing designer clothes or taking expensive vacations. In more than 45 percent of fraud cases, the survey said, coworkers and others noticed the fraudster had adopted a more extravagant lifestyle.
Another off-the-job red flag is employees who are experiencing financial difficulties, Anderson said. Perhaps a family member or close relative is suffering through an expensive illness. Or, maybe the family's primary breadwinner is unemployed. Look also for an employee who complains about mounting debts or foreclosure proceedings on his or her house — or might actually have lost the home. In 30 percent of frauds, the perpetrator was struggling with personal financial difficulties.
On the job, look for employees, particularly those in purchasing or operations, who are unusually close to a vendor or customer, he said. Perhaps they regularly socialize with that person or receive tickets to baseball games, the theater or other events. Look for a salesperson who spends an inordinate amount of time with a customer's employee. Fraud investigations found this type of activity in 20 percent of fraud cases.
Another on-the-job red flag is employees with control issues, Anderson said. Perhaps the employee insists on being the only one to perform certain duties or gets overly defensive when a coworker tries to get involved in his or her job. In one case he investigated, Anderson said the fraudster was the only employee in the company who could process payroll. The employee actually had to be taken from the hospital in an ambulance in order to run payroll on one occasion, Anderson said. The ACFE report found that nearly 15 percent of frauds involved an employee with these types of control issues.
Other important behavioral red flags identified in the report, he said, include a "wheeler-dealer" attitude; divorce or other family problems; substance or gambling addictions; and constant complaints about inadequate pay or lack of authority.
"This is not to say that every employee who displays one of these signs is intent on defrauding the company," said Anderson, a Certified Fraud Examiner and an ACFE member. "They may be suffering through a difficult personal situation, but managing it nonetheless.
In upcoming posts, Anderson will continue to share results from the ACFE's 2016 Report to the Nations. The Association of Certified Fraud Examiners is the world largest anti-fraud organization, dedicated to fighting fraud through its more than 75,000 members in more than 150 countries worldwide.
Anderson said he believes the most effective protection for every organization comes from a comprehensive fraud deterrence program created by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.
Posted May 8, 2016 by Steve & filed under Blog Articles, Forensic Accounting, Fraud, Fraud Deterrence.
The perpetrators of fraud come in all shapes and sizes, demographically speaking. But fraud investigations throughout the years have been able to pinpoint the more typical characteristics of a fraudster, and some of the results are surprising. The Association of Certified Fraud Examiners (ACFE) collected extensive data about the people who commit fraud during the association's biennial international survey to study the costs, schemes, perpetrators and victims of fraud.
Although most people believe fraudsters are career criminals, Anderson said, latest findings from the ACFE's 2016 Report to the Nations showed more than 88 percent of fraud perpetrators never had been charged or convicted of a fraud; another six percent had been charged but not convicted. Almost 83 percent of fraudsters never had been punished or terminated by a previous employer for fraud-related conduct, and an additional eight percent had been terminated but never punished.
Another surprise involved the tenure of the employee committing the fraud, Anderson said. More than 42 percent of fraud perpetrators had been with their company between one and five years – neither a very short time nor a very long time. Less than eight percent had tenure of under a year, while 23% had tenure of more than 10 years.
Not surprisingly, Anderson said, was the finding that the higher the position the employee held, the greater the loss. Frauds carried out by a regular employees caused a median loss of $65,000, while those carried out by a managers caused a median loss of $173,000 and those carried out by owners/executives caused a median loss of $703,000.
Fraud investigations have found 55 percent of all fraud perpetrators were between the ages of 31 and 45 and that men were more than twice as likely to be the perpetrator as women. Also, the older or the more educated the perpetrator, the higher the loss tended to be, usually because these people were higher up in the organization.
Over the next several weeks, Anderson will share findings from ACFE's 2016 Report to the Nations. The Association of Certified Fraud Examiners is the world largest anti-fraud organization, dedicated to fighting fraud through its more than 75,000 members in more than 150 countries worldwide.
Posted May 1, 2016 by Steve & filed under Blog Articles, Forensic Accounting, Fraud, Fraud Deterrence.
Fraud investigations worldwide reveal that asset misappropriation, corruption and financial statement fraud are the three main types of fraud, according to the Association of Certified Fraud Examiners (ACFE).
The ACFE has identified these three key types of fraud in its biannual Reports to the Nations, the results of global surveys conducted biennially to study the costs, schemes, perpetrators and victims of fraud. The recently released 2016 Report confirms these three types remain the most frequently conducted frauds.
"Asset misappropriation is by far the most common type of fraud, but financial statement fraud, while not nearly as common, is a far more costly type of fraudulent activity," said Anderson, an ACFE member.
According to the ACFE, asset misappropriation — or the theft of cash or other assets such as inventory, supplies or company equipment — occurs in more than 80 percent of reported fraud cases. Because some fraud investigations find that more than one type of fraud is committed within the same incident, the total of the three types exceeds 100 percent. The median dollar loss reported from asset misappropriation is $125,000, the 2016 ACFE study noted.
Corruption occurs in more than 35 percent of the reported fraud cases, the report found. Fraud by corruption involves misusing one's influence (such as persuading someone to use a particular vendor or hire a particular person) or violating one's duty to one's employer (such as purchasing from a vendor whose price is more expensive or whose product is inferior, or hiring a less qualified employee). The ACFE said the median dollar loss from corruption is $200,000.
Financial statement fraud represents only 10 percent of the reported cases of fraud, but the median dollar loss from this type of fraud is $975,000, the ACFE report says. Fraud investigations have shown that financial statement fraud occurs when a person intentionally misstates or omits material information from an organization's financial statements, according to the ACFE.
The report explained that financial statement fraud can be perpetrated against a lender (by overstating a company's sales, profits or assets in order to get a loan); an acquirer (by overstating a company's sales, profits or assets in order to get a higher acquisition price); or shareholders/the public (by overstating a company's sales, profits or assets in order to boost a company's share price).
"Regardless of the type of fraud, it is clear that organizations today are at high risk of loss due to fraud and that every business, government entity and organization must have a strong fraud deterrence program in place to combat it," said Anderson.
A comprehensive fraud deterrence program developed by a firm that provides forensic accounting services in Philadelphia and the Delaware Valley can help protect your organization, Anderson said. At the first hint of suspicious activity, Anderson urges organizations to contact a Certified Fraud Examiner to conduct a thorough fraud investigation and end the fraudulent activity.
During the coming weeks, Anderson will share more findings from ACFE's 2016 Report to the Nations. The Association of Certified Fraud Examiners is the world largest anti-fraud organization, dedicated to fighting fraud through its more than 75,000 members in more than 150 countries worldwide.
Posted April 25, 2016 by Steve & filed under Blog Articles, Forensic Accounting, Fraud, Fraud Deterrence.
David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.
As a Certified Fraud Examiner, I belong to the Association of Certified Fraud Examiners ("ACFE"). This international organization has more than 75,000 members in more than 150 countries throughout the world dedicated to fighting fraud through rigorous fraud investigation and fraud deterrence programs.
Every two years, the ACFE conducts a global fraud survey to study the costs, schemes, perpetrators and victims of fraud. This month, the ACFE released its 2016 Report to the Nations, detailing the results of its latest survey. In the next several blog articles, I will present updates to previous articles which were based upon the 2014 Report to the Nations. First up, the latest trends in anti-fraud controls installed by businesses and other organizations.
The 2016 Report identified the fastest growing anti-fraud control as use of confidential hotlines for reporting fraud. The implementation rate grew by almost nine percent in the past two years to more than 60 percent – meaning that more than 60 percent of businesses and other organizations currently use these hotlines. What also is new is that more businesses are using not just telephone-based hotlines but also are providing for confidential reporting of fraud via their websites and/or e-mail.
The next fastest growing anti-fraud control is the implementation of fraud training for employees. Approximately 52 percent of all businesses and other organizations provide this to their employees – an increase of nearly 8 percent from the 2014 survey.
What all of these anti-fraud controls have in common is that they show a "tone at the top" which says management does not condone fraud and is committed to fighting it. None of these anti-fraud controls is overly expensive, especially in light of the continuing fact that the cost of fraud to the typical company is approximately 5 percent of revenues.
Look for more details on these and other findings from the ACFE 2016 Report to the Nations in my next series of blogs.
Posted April 18, 2016 by Steve & filed under Blog Articles, Forensic Accounting, Fraud, Fraud Deterrence.
The Fraud Triangle is a troika of troublesome tendencies – Opportunity, Pressure and Rationalization – that often are present when fraud is taking place.
In previous posts, David Anderson of David Anderson and Associates, a Certified Fraud Examiner offering forensic accounting services in Philadelphia, has mentioned that if at least one of the three factors can be eliminated, the potential for fraud and the need for a fraud investigation is either significantly reduced or goes away.
In this article, Anderson takes a closer look at the final leg of the triangle – Rationalization.
Rationalization is the mental process that a potential fraudster goes through to justify committing the fraud.
The owner/management is committing fraud, so why shouldn't I?
I have been "wronged" by the company/owner/management, so this is how I can get back at them.
Letting employees know that management is watching and is implementing such anti-fraud measures as surprise audits and regular management reviews.
Taking these steps as well as steps discussed in the previous two articles (establishing strong internal controls and getting to know one's employees better) are all part of dismantling the three legs of the fraud triangle.
Posted April 11, 2016 by Steve & filed under Blog Articles, Forensic Accounting, Fraud, Fraud Deterrence.
We are constantly reminded to create difficult-to-guess passwords, change our passwords frequently, install security hardware and software and regularly update our software to protect against cyber-based fraud.
However, according to David Anderson, a Certified Fraud Examiner and principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley, some of the most effective and costly frauds – socially engineered frauds – are capable of completely ignoring and bypassing such safeguards.
Anderson, whose firm conducts fraud investigation and installs fraud deterrence programs, said this information can include, but does not have to be limited to, social security numbers, birthdates and bank account numbers.
First, he said, is "The IRS Scam." This involves, in its most common form, phone calls or, less commonly, email messages coming from the Internal Revenue Service.
The caller informs the recipient past taxes and penalties are owed, and if the recipient doesn't immediately pay these amounts, IRS agents are poised to haul the person off to jail, or seize the recipient's house or cars. The recipient is told to purchase a prepaid debit card for the amount owed and to call back with the debit card information.
This year, a variant of The IRS Scam has appeared, Anderson said. The caller informs the recipient that there is a problem with the recipient's tax refund, and the caller must verify certain information including names, wage amounts and social security numbers for the recipients and their dependents. The fraudster then uses this information to file phony tax returns which seek large refunds that, of course, are to be mailed to the fraudster.
Please note that while the IRS regularly informs taxpayers of tax issues or problems, it does not phone or email them. Despite this, a significant number of people fall prey each year to this scam.
The second socially engineered fraud issue detailed by Anderson is the "Bank-Amazon-eBay-PayPal Scam." This one occurs via email, making it a "phishing" variety of fraud. The recipient is informed that either there is a problem with his or her online account, or that password information has expired and must be updated.
The email contains a "convenient" link for the recipient to log in to his or her account. The link is designed to appear to be from the recipient's bank or Amazon or eBay or PayPal. For example, it would have a URL address similar to "update.amazon.partnerresults.com." Because the name of the service or firm appears in the link, the recipient believes the link will take him and her to the named site.
Instead, the link takes the recipient to a dummy site where the recipient unwittingly provides the fraudster with a user ID, password and other personal information. This enables the fraudster to access the recipient's actual account and to improperly withdraw funds or to order merchandise paid for from the recipient's credit card or bank account, if that information previously had been stored in the recipient's account profile.
As with the IRS, most banks, Amazon, eBay and PayPal advise their customers they do not communicate such matters via email. These services advise clients they should go to their corporate site directly to log in and update information rather than clicking on any email links. Again, despite such alerts and warnings, this remains a popular and effective scam.
Finally, Anderson tells of the "You Have Won!" scam. In this cyber subterfuge, the recipient receives a phone call informing him or her that he or she has won an expensive car or vacation in the caller's sweepstakes. The caller informs the recipient that before the prize can be awarded, the recipient must pay taxes on the prize.
The recipient is given the option of having the funds withdrawn from his or her bank account – by providing the bank account information to the caller – or by paying via credit card – again, by providing credit card information. In either case – bank account or credit card – the recipient who provides such information either has his or her bank account "cleaned out" or his or her credit card charged to up to the credit limit for fraudulent purchases.
He said everyone should be cautious about responding to such "attacks" and never should give out sensitive personal security and financial information unless there is absolute certainty that the entity on the other end of such a transaction is the actual organization we think it is and not a social-engineering-savvy fraudster.
Posted April 4, 2016 by Steve & filed under Blog Articles, Forensic Accounting, Fraud, Fraud Deterrence.
The Fraud Triangle is a triumvirate of factors – Opportunity, Pressure and Rationalization – that must be present in order for a fraud to occur.
In this article, Anderson takes a closer look at the second leg of the triangle – Pressure. In the third article of this series, he will zero in on Rationalization.
Pressure refers to the personal situation of the potential fraudster that can induce the person to commit the fraud. Even if the opportunity to commit fraud is present, if the person feels no pressure to commit the fraud, he or she won't.
The primary pressure the potential fraudster experiences is the need for money. Other potential pressures (which are significantly less likely to occur) include revenge (the fraudster feels wronged by the business, its owners or management) and thrill (the fraudster has no need for money, but wants the thrill of committing and getting away with the fraud).
The potential fraudster is going through a divorce or other family problems that require more money than is currently being earned.
Although the specific circumstances experienced by the potential fraudster are generally beyond the control of a business's owners and/or management, the owners and managers should be on the lookout for these types of problems. It is often as simple as getting to know better the employees who could have the opportunity to commit fraud.
Has the owner or manager noticed whether an employee is driving a more expensive car or wearing more expensive jewelry and/or clothing than would be expected?
Has the owner or manager heard (or has it been reported to the owner or manager by another employee) an employee discussing expensive vacations, the purchase of an expensive home or vacation home or the purchase of an expensive boat that would appear to be more than the employee would be capable of handling?
Has the owner or manager heard (or has it been reported to the owner or manager by another employee) the employee discussing family problems, a family member's illness or injury or a family member's loss of employment?
Has the owner or manager heard (or has it been reported to the owner or manager by another employee) the employee discussing gambling winnings or losses?
Has the owner or manager noticed (or has it been reported to the owner or manager by another employee) an employee exhibiting signs of a drug problem?
Has the owner or manager heard (or has it been reported to the owner or manager by another employee) the employee complaining about being underpaid or passed up for a deserved raise, bonus or promotion?
If the answer to any of these questions is "yes", the next step would be to consult with the company's attorney before taking any action (including confronting the employee or questioning other employees).
By being proactive with getting to know one's employees better, the owner or manager can help identify when an employee is facing a pressure which could potentially turn the employee into a fraudster.
Posted March 30, 2016 by Steve & filed under Blog Articles, Forensic Accounting, Fraud, Fraud Deterrence.
The Fraud Triangle is a combination of three factors – Opportunity, Pressure and Rationalization – that must be present in order for a fraud to occur.
In this article, Anderson takes a closer look at the first leg of the triangle – Opportunity. In subsequent articles, he will examine the other two legs.
Businesses will install a set of policies and procedures as part of their fraud deterrence programs that are designed to protect systems and safeguard assets. These policies and procedures are often referred to as "internal controls". If such internal controls are lacking, are poorly designed, or are easily overridden, it presents the potential fraudster with the opportunity to commit fraud.
The first, he said, is for handling payments made by customers. In a well-designed internal control system structured with fraud deterrence in mind, the person who opens the mail will be different from the person who prepares the deposit slip for the bank. Furthermore, neither of these people will actually make the bank deposit or record the receipt of funds and bank deposit in the company's accounting system. In addition, the entire process would be overseen by a manager or supervisor. This step helps in fraud deterrence and lessens the need for a fraud investigation.
However, as this example indicates, these controls require that there be at least five different people involved. Many smaller businesses don't have enough staff to separate these functions. As a result, some employees end up performing more than one of these functions. This creates an opportunity for the employee to commit fraud.
For example, the employee who opens the mail could also prepare the deposit slip and record the receipt of funds and bank deposit in the company's accounting system. If that employee is trusted by the manager/supervisor, the manager/supervisor might not actively review the employee's activities. This creates the opportunity for the employee to divert certain customer payments.
A second common business situation is for processing vendor invoices. In a well-designed internal control system, the person who sets up the vendor in the company's accounting system is different from the person who approves the vendor invoice. Furthermore, neither of these people actually enter the invoice in the company's accounting system, process the payment or sign the payment check.
As with the previous example, the entire process would be overseen by a manager or supervisor. If a company is unable to separate these duties, it creates an opportunity to commit fraud. If the employee who sets up vendor in the company's accounting system can also enter vendor invoices and process payments, that employee would have the opportunity to create a phony vendor (or change the address of an actual vendor), process phony invoices and produce payments that the employee could divert for his/her own use.
Well-designed internal control systems help prevent the opportunity for the fraudster to commit fraud. This, in turn, "knocks out" one leg of the fraud triangle, thereby preventing or significantly reducing the potential for fraud.