FRAUD & THE CONTROLLER

For CPA’s and audit firms, there’s been a major disagreement going on for years as to whether or not in an audit or review, fraud should be detected.  Most investors have always assumed that it was the accountant’s main objective to discover fraud.  However, determining whether there are material misstatements in the financial statements is not the same thing as detecting fraud.  That said, I believe that a controller has the very clear responsibility to implement controls to prevent fraud.  I can think of nothing worse than to have a major fraud discovered in a company with a controller.  There are exceptions.  Mainly, the one exception I see is if it is fraud by management overriding controls.  That’s difficult for a controller to detect unless they have observed it first hand.

Fraud comes in all shapes and sizes.  Would you believe that churches are repeatedly victims of fraud.  Here are some of the fraud schemes we will look at in the coming weeks.

  • Invoicing Schemes
  • Checkbook schemes
  • Accounts Payable schemes
  • Payroll Schemes (ghost employees)

We’ll also look at ‘Report to the Nations on Occupational Fraud & Abuse’ 2012 Global Fraud Study.  Some of the statistics are actually quite sobering.  Did you know that:

  • 77% of all frauds are committed by personnel in Accounting, Operations, Sales, Executive/Upper Management, Customer Service & Purchasing.  Six departments all who have some degree of control over cash.  And some, more than others.
  •   In the U.S. 43.1% of discovered cases of fraud were through tips.
  • 87% of all occupational fraudsters are first time offenders.
  • Occupational Fraud is a significant threat to small business
  • The median loss was $140,000 with 1/5th involving $1,000,000+.
  • Companies in 2012 with less than 100 employees averaged more in dollar losses ($147,000) than companies with over 10,000 employees ($140,000)

(All of the above taken from ‘Report to the Nations)

After spending several hours the other night researching cases on the FBI website, I can tell you that after a while there is a pattern that emerges that even the non-accountant can easily perceive.  When it comes to their money, too many business owners just had to be asleep at the wheel for some of these frauds to be perpetuated.

If you are working as a controller, the owner(s) of your company has most likely already realized the need for your services.  As a controller, you must keep your eye on much more than accounting, inventory, accounts payable, general ledger and all the other things that demand our time.

In future articles we’ll look at some steps to take to start building a strong foundation of internal controls, especially over cash.

RULE Number ONE on the list.  CROSS TRAINING.  I promise you, most likely you will get resistance.  Use your imagination on this one if you have to.  No bookkeeper in a business should be the only person who can handle the deposits and the disbursements.  Finally, I think the statistic still stands………………one in four employees steal from their companies.  It’s time to pay attention if you haven’t been. 

Calling all Controllers & Accountants to reply!!!

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