1. 's
ISSUES & INSIGHTS
Fraud May Come From Those You Least Suspect
By James Johnson, Senior Audit Manager, Armanino McKenna Certified Public Accountants & Consultants
It’s no big secret, times are tough all over. Unem-
ployment rates are holding at all time highs, there
are record declines in property values as well as
a multitude of short sells and foreclosures; even
layoff announcements are still appearing more
than anyone would hope. With all of the pressures
of the “great recession” there is a noticeable in-
crease in the burden this puts on families, espe-
cially those who are now reluctantly appointed to
the role of sole contributor. Finding ways to in-
crease income to make ends meet proves difficult, ting larger and larger as time goes on. Without accurate, and strengthen financial reporting.
and sometimes a convenient way to gather addi- effective internal controls and risk management
tional income and relieve them of financial stress processes in place to detect and mitigate fraud, Costs Associated
is through fraud. companies may find they have a little less (and Risk assessment evaluation and documentation
sometimes a lot less) cash at the end of the year. and internal compliance audits do require compa-
The pure longevity of the recession is leading ny hours and therefore accumulate payroll costs.
many employees, whose savings are now de- Planning is Key External compliance costs fluctuate and can vary
pleted, to commit fraud against their companies. Foresight is the main way to plan and prepare based on each company’s needs and the extent of
Management can be very quick to place trust in for changes in the economy that might increase testing desired. However, the good news is, there
their employees, especially long-term ones whom an employee’s motivation to commit fraud. One are options for every company regardless of size,
they have known for a while and built a rela- major way to reduce the risk is to ensure effec- with a pricing structure that works for each situ-
tionship with. Ironically, these employees, often tive processes and controls are in place. Below are ation. The price of not performing an evaluation
times, are the first to commit fraud as they are in steps a company can take to mitigate the risk of could add up to more in loss of assets or inves-
a position of knowing the company’s control pro- fraud from their employees. tor/client confidence than the initial cost of es-
cesses, and more importantly, how to get around tablishing solid processes, especially in times of
them. Since there is already established trust in 1. Maintain awareness of changes in lifestyle economic downturn where the motivation to com-
the employees from the owners, owners tend not or demeanor of employees mit fraud from an employee’s perspective is far
to question these long-term employees. 2. Perform and document a formal risk assess- greater than when times are good.
ment of the company – evaluated and up-
Looking for Signs of Fraud dated periodically How Armanino McKenna Can Help
There are signs a company can look for regarding 3. Implement controls to strengthen accounting Armanino McKenna’s consulting group has ex-
their employees, in order to detect potential fraud. procedures based on the formal risk assess- tensive experience in compliance especially sur-
One sign can be a change in the employee’s life- ment rounding internal control documentation and risk
style or demeanor. Shifts that occur that haven’t 4. Perform internal compliance testing of in- assessment. In addition, our audit team has over
happened in the past such as new cars or expen- ternal controls – examples include review 20 years experience with internal controls in-
sive vacations can be an indicator. Although hard- of vendor listings, examination of vendor cluding performing SAS 70 audits. We have per-
er to correlate directly to company fraud, changes payments, testing a sample of cash disburse- formed hundreds of operational and compliance
in mood can also be a trigger. Stresses of a spouse ments and G/L postings engagements, helping small and large companies
losing a job, unpaid bills and a shift from happy to 5. Employ a CPA firm to perform compliance alike to identify internal control and operational
sad might be enough motivation and an indicator and operational audits – these may include weaknesses, provide recommendations on im-
for an employee to attempt fraudulent acts. One SAS 70 audits, internal control testing, op- provements and implement procedures. We listen
example is a controller or accounts payable clerk erational reviews, etc. to our clients’ needs first before offering a solu-
no longer getting approval for certain expense 6. Ensure whistleblower policies are in place; tion, thereby, enabling us to provide the most ap-
payments or certain account reconciliations in or- communicate often propriate services at a price that meets their bud-
der to hide the fraud. 7. Question employees with respect to knowl- get.
edge or suspicion of fraud
Studies have shown, once a person starts per-
forming fraud, they don’t stop. The employee Increasing the strengths of controls and proce- James Johnson is a Senior Manager in the Au-
rationalizes they are owed this money either due dures, like those listed above, will not only reduce dit Department at Armanino McKenna and can
to longevity with the company, the extra work the risk of theft but also increase accounting accu- answer any questions regarding this article. Con-
they perceive they do or a sense of entitlement to racy and operational efficiencies, ensure transac- tact James at (925) 790-2698 or e-mail Jim.John-
it. Whatever the case, the fraud perpetuates, get- tions recorded through the processes identified are son@amllp.com.
© 2010 Armanino McKenna LLP. All Rights Reserved.