Question

Over the last ten years, we have witnessed a virtual explosion of corporate accounting fraud from some of the world’s largest multi-nationals. Some of these frauds imply collusions between management, their internal accounting department, and their auditors.

1. Do you think that management is equipped with the requisite knowledge and skills to identify red flags of corporate accounting fraud? Briefly discuss your response.

2. List two controls that you will implement as a manager to mitigate accounting fraud risks in your company?

kidly give answer in 500 to 700 words

Answer 1

1. Do you think that management is equipped with the requisite knowledge and skills to identify red flags of corporate accounting fraud? Briefly discuss your response.

Ans:

All organizations face fraud risk, which can either be internal or external. Internal risks come from persons within the organization who use their positions to enrich themselves by misappropriating resources and assets owned by their employer. On the other hand, external risks are engineered by government officers, customers, and contractors who may represent facts to obtain money illegally.

Red Flag Warnings of Fraud

There are several red flags that audit and accounting professionals should look out for when detecting fraud within an organization. They include:

Inventory shrinkage

Although it’s normal to lose a few items of inventory while moving items, excessive inventory shrinkage may be an indicator of ongoing fraud. An auditor can detect inventory shrinkage by looking at the balance sheet, the number of products in stock and those sold and comparing them with previous records and projections. In certain circumstances, the auditor may do unplanned stock-taking on random days to detect any unusual characteristics.

Missing documents

An organization may experience frequent cases of reported missing documents that relate to critical departments. When the frequency of occurrence becomes too often, it may be a sign of ongoing fraud within the organization. Some of the documents that are likely to go missing include register of motor vehicles, list of sales and purchases, checkbooks, inventory reports, etc. When such records disappear, it may point to an undesirable situation that may lead to loss of certain assets or money.

Multiple payments

There are cases when a company’s accounting department may erroneously process duplicate payments to a vendor or service provider. If the mistake was genuine, the officers involved ought to identify such errors and report so that urgent action can be taken.

However, there can be cases where individual employees endorse duplicate payments to both genuine and fake companies. Some employees may even process payments to non-existent companies with the intention of defrauding the employer. To prevent such errors, all payments should be monitored and verified that they are going to the intended parties.

Spikes in invoice volume

A business in its growing phase may experience huge spikes in the number of invoices as it tries to carve a niche in the market. However, the high number of invoices creates room for fraudulent behaviors, as specific internal and external parties seek to profit from the rapid growth of the business.

For example, there can be cases of unrecorded payments, or if they are recorded, they are understated in volume and amount. The organization should know when spikes occur and ensure all orders made by customers are recorded and fulfilled as they are ordered.

Frequent complaints

Frequent complains about certain personnel or processes may be an indicator of fraud. When an organization receives repeated complaints about a senior executive, it should not assume that as usual venting. Instead, it should conduct investigations to identify the cause of the complaints, effects and any courses of action that they should take to make sure there are no more complaints.

Also, customers may report frequent under-packing of products, where the products delivered to them are less than they ordered. The organization should investigate whether this is a deliberate action by the sales department or a problem with the packaging department.

Excessive number of adjusting entries

Some accounting offices may make excessive adjusting entries in the books of accounts as a way of covering some of the money misappropriated in the past. For example, some of these adjustments may include customer adjustments that significantly affect the financial results during a specific period.

Making excessive adjustments without particular purposes points to cases of employees’ fraud with the intention of hiding certain transactions. Any adjusting entries in the financial accounts should be accompanied by corresponding notes explaining the reasons for the adjustments.

Employee Fraud Red Flags

A large proportion of fraud affecting organizations comes from within the organization itself, mainly from employees. Some of the behavioral signs of employee fraud include:

Lifestyle changes

Employees ought to live within their means, by buying assets and services that are within their income. However, some employees may change their lifestyle abruptly by spending more than their paycheck allows. The purchases can be expensive cars, houses, and luxury goods. Sometimes, the employee’s lifestyle may exceed that of their superior.

Any abrupt changes in the employee’s lifestyle without a proportionate increase in their incomes should be investigated to see if there is a probability that the individual is involved in fraud.

History of debts

During the hiring process, an organization should conduct background checks to see if potential employees have a history of debts in their previous organizations. When a company hires employees with debt problems, there is a likelihood that they will find opportunities to get extra income above their salary to pay debts. It may mean engaging in opportunistic fraud with the intention of obtaining money that they are not entitled to.

Excessive gambling

Some employees may continuously engage in gambling as a way of getting quick cash to meet some of their needs. However, in gambling, the participants must be willing to lose and gain as they gamble on future events such as football matches or casino games. Due to the addictive nature of gambling, the employee’s income may be insufficient to finance their gambling activities and may be forced to do anything to earn extra income. It may mean engaging in fraudulent activities such as stealing the organization’s assets, manipulating inventory, making extraordinary claims, etc.

Identifying employees involved in gambling and helping them get out of the behavior can help the company reduce incidences of fraud while helping them manage their finances.

Key Takeaways from Fraud Red Flags

Every organization, including those with the most stringent rules, are at risk for fraud. To prevent fraud from happening, organizations must first acknowledge that fraud exists and create awareness among the stakeholders. Organizations should start by training their employees on how to detect fraud at work. They should also implement policies and procedures that will help them seal the loopholes used by fraudsters to conduct their activities.

2. List two controls that you will implement as a manager to mitigate accounting fraud risks in your company?

Ans: (take any two from below)

It is vital to an organization, large or small, to have a fraud prevention plan in place. The fraud cases studied in the ACFE 2014 Report revealed that the fraudulent activities studied lasted an average of 18 months before being detected. Imagine the type of loss your company could suffer with an employee committing fraud for a year and a half. Luckily, there are ways you can minimize fraud occurrences by implementing different procedures and controls.

1. Know Your Employees

Fraud perpetrators often display behavioral traits that can indicate the intention to commit fraud. Observing and listening to employees can help you identify potential fraud risk. It is important for management to be involved with their employees and take time to get to know them. Often, an attitude change can clue you into a risk. This can also reveal internal issues that need to be addressed. For example, if an employee feels a lack of appreciation from the business owner or anger at their boss, this could lead him or her to commit fraud as a way of revenge. Any attitude change should cause you to pay close attention to that employee. This may not only minimize a loss from fraud but can make the organization a better, more efficient place with happier employees. Listening to employees may also reveal other clues. Consider an employee who has worked for your company for 15 years that is now working 65 hours a week instead of 40 because two co-workers were laid off. A discussion with the employee reveals that in addition to his new, heavier workload, his brother lost his job and his family has moved into the employee’s house. This could be a signal of potential fraud risk. Very often and unfortunately, it’s the employee you least expect that commits the crime. It is imperative to know your employees and engage them in conversation.

2. Make Employees Aware/Set Up Reporting System

Awareness affects all employees. Everyone within the organization should be aware of the fraud risk policy including types of fraud and the consequences associated with them. Those who are planning to commit fraud will know that management is watching and will hopefully be deterred by this. Honest employees who are not tempted to commit fraud will also be made aware of possible signs of fraud or theft. These employees are assets in the fight against fraud. According to the ACFE 2014 Report, most occupational fraud (over 40%) is detected because of a tip. While most tips come from employees of the organization, other important sources of tips are customers, vendors, competitors, and acquaintances of the fraudster. Since many employees are hesitant to report incidents to their employers, consider setting up an anonymous reporting system. Employees can report fraudulent activity through a website keeping their identity safe or by using a tip hotline.

3. Implement Internal Controls

Internal controls are the plans and/or programs implemented to safeguard your company’s assets, ensure the integrity of its accounting records, and deter and detect fraud and theft. Segregation of duties is an important component of internal control that can reduce the risk of fraud from occurring. For example, a retail store has one cash register employee, one salesperson, and one manager. The cash and check register receipts should be tallied by one employee while another prepares the deposit slip and the third brings the deposit to the bank. This can help reveal any discrepancies in the collections.

Documentation is another internal control that can help reduce fraud. Consider the example above; if sales receipts and preparation of the bank deposit are documented in the books, the business owner can look at the documentation daily or weekly to verify that the receipts were deposited into the bank. In addition, make sure all checks, purchase orders and invoices are numbered consecutively. Use “for deposit only” stamps on all incoming checks, require two signatures on checks above a specified dollar amount and avoid using a signature stamp. Also, be alert to new vendors as billing-scheme embezzlers setup and make payments to fictitious vendors, usually mailed to a P.O. Box.

Internal control programs should be monitored and revised on a consistent basis to ensure they are effective and current with technological and other advances. If you do not have an internal control process or fraud prevention program in place, then you should hire a professional with experience in this area. An expert will analyze the company’s policies and procedures, recommend appropriate programs and assist with implementation.

4. Monitor Vacation Balances

You might be impressed by the employees who haven’t missed a day of work in years. While these may sound like loyal employees, it could be a sign that these employees have something to hide and are worried that someone will detect their fraud if they were out of the office for some time. It is also a good idea to rotate employees to various jobs within a company. This may also reveal fraudulent activity as it allows a second employee to review the activities of the first.

5. Hire Trustworthy Experts

Many of the people working for your company, including Certified Fraud Examiners (CFE), Certified Public Accountants (CPA), and CPAs who are Certified in Fraud Forensics (CFF) can all play important roles in establishing antifraud policies and procedures. However, not all of these experts have the experience or the reputation for providing the service that is best for your needs. When hiring accountants, fraud examiners, and other expert professionals who will have access to sensitive company information such as bank account numbers, it is critical to ensure these firms or individuals have reputations built on quality service and trustworthiness. This way, you can feel confident that your forensic analyses, basic financial and business consultations, and internal control audits are thorough, and your information will never be compromised.

6. Live the Corporate Culture

A positive work environment can prevent employee fraud and theft. There should be a clear organizational structure, written policies and procedures and fair employment practices. An open-door policy can also provide a great fraud prevention system as it gives employees open lines of communication with management. Business owners and senior management should lead by example and hold every employee accountable for their actions, regardless of position.

Fraud Detection

In addition to prevention strategies, you should also have detection methods in place and make them visible to the employees. According to Managing the Business Risk of Fraud: A Practical Guide, published by Association of Certified Fraud Examiners (ACFE), the visibility of these controls acts as one of the best deterrents to fraudulent behavior. It is important to continuously monitor and update your fraud detection strategies to ensure they are effective. Detection plans usually occur during the regularly scheduled business day. These plans take external information into consideration to link with internal data. The results of your fraud detection plans should enhance your prevention controls. It is important to document your fraud detection strategies including the individuals or teams responsible for each task. Once the final fraud detection plan has been finalized, all employees should be made aware of the plan and how it will be implemented. Communicating this to employees is a prevention method in itself. Knowing the company is watching and will take disciplinary action can hinder employees’ plans to commit fraud.