Joe Epps 2013-09-19 00:40:18
Fraud Risk Assessment Joe Epps is a CPA and CFE with over 30 years of experience in forensic accounting. His litigation support experience includes contract disputes, antitrust, economic damages, fraud investigations, business valuation and intellectual property litigation. Joe is currently president of Epps Forensic Consulting and teaches a graduate course on forensic accounting at Arizona State University. For more information, please call (480) 595-0943 or visit www.eppsforensics.com. Although the economy is improving, high unemployment, depressed home values and general uncertainty create tremendous financial stress among even trusted employees. Stress is one of the factors that contribute to the potential for employee fraud. Even long-term and highly-trusted employees are not immune to personal stressors, and, given the right conditions and opportunity, may be tempted to cross the line. The stressors may include: a relative losing a job, potential foreclosure on a home, declining home values or continued uncertainty about the future. Management may know how they are treating their employees, but they usually have no idea about other outside stressors that can impact even the most honest and diligent employee. Management has a duty to protect each employee through the implementation of a strong internal control system with defined policies. Furthermore, this system must include a clear mission statement that is echoed throughout the organization via the tone from the top. There are three key types of people who commit employee fraud: 1. True Criminals – They are always looking for a way to take advantage. 2. Opportunistic Criminals –the employee who, day aft er day, sees an opportunity to gain some financial advantage through theft or embezzlement at their company. Although the opportunities have existed for years, they have never committed or seriously considered committing a fraud against their employer. However, under stress they may act on an impulse and give in to the temptation. 3. Stress Criminals – This is the employee who, under extreme stress, looks for a way to steal property or embezzle money. From the company’s standpoint, catching and prosecuting the true criminals is both necessary and rewarding. There is a certain satisfaction in catching and prosecuting those who look for ways to steal from the company. However, the feeling is very different with the opportunistic and stress criminals. These are employees who were generally hard-working and trusted. When one of these employees gets caught committing fraud, the company loses a good employee and an otherwise honest person may go to jail. When this happens, management also has their faith in all employees shaken and must find a way to continue working in an open manner with other employees. One preventative step to avert any type of potential employee fraud is to perform an at-risk assessment of the company’s assets that may be at risk from employee dishonesty – everything from equipment, to inventory, to credit cards and cash on hand. An at-risk assessment starts with the identification of the assets that could be stolen or misused and continues with a review of controls to determine whether adequate protections are in place. The at-risk assessment can be performed by an experienced CPA, who may or may not be a forensic accountant. An internal audit department may also be tasked with performing these types of assessments. Whoever performs the assessment should seek out company representatives who understand the stated company controls, and who can navigate the cultural nuances within the company to determine what is actually being done. It is not unusual to find that the stated policies and procedures have morphed over time so that what is actually being done is nothing like what was originally intended. Companies should also let their employees know that they will prosecute employee fraud. One of the most significant deterrents of employee fraud is the certainty that employees will be prosecuted if they commit fraud against the company. The company must have internal control systems and monitor them to make sure they are effective. This means considering both aptitude and attitude. For internal controls to be effective, the people responsible for overseeing internal controls must know what the proper procedures are, have the aptitude to follow up on details, and the attitude that internal controls are important and must be followed. Without these factors, the best internal controls can be totally ineffective. Taking steps to protect the assets of the company during this unusually stressful period also protects the people in the organization. Since people are the most important asset of a company, it is very sad to find that a trusted employee has given into temptation under stress. If the temptation is removed by confirming internal controls are effective, an otherwise honest and productive employee may be protected.
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