Joe Epps 2014-05-06 23:25:08
Fraud Detection & Prevention: Simple Steps It is a news headline all too familiar. Investors defrauded out of millions by a wealthy financier. Accounting fraud committed at a multi-billion-dollar corporation by management. Employee embezzled hundreds of thousands from his company. While the magnitude of fraud involved in the cases that make headlines does not occur at all organizations, all organizations are at risk for fraud. Fraud detection analysis is a tool which can be used by organizations to minimize the potential for fraud to occur. The suggestions offered below will help identify important information to focus on when performing a fraud detection analysis. IDENTIFY RELEVANT RELATIONSHIPS WITHIN THE DATA Almost 90 percent of occupational fraud or employee theft occurs via asset misappropriation. Examples of asset misappropriations include skimming, falsifying expense reimbursements or billing, and payroll fraud. These potential fraud schemes can be directly linked to line items in the internal profit and loss statements. By analyzing relationships in the financial data, irregularities and potential fraud can be identified and further investigated. For example, third-party consultant or contractor costs per month or quarter could increase due to fictitious invoices. Increased travel expenses per employee could indicate an employee is falsifying expense reports. Payroll expenses per location could increase due to the creation of fictitious employees. As with most elements of income and expenses, there are multiple factors affecting their behavior. Any one comparison does not necessarily tell the full story, but by performing a few periodic tests on some high-risk areas, abnormalities can be identified and investigated. Highrisk areas will vary by industry; some potential data relationships to monitor for fraudulent activity are: • Number or dollar amount of customer discounts per number or dollar amount of sales; • Sales per location, employee, hour or number of transactions; • Any expense line item as a percentage of sales or other relevant factor; • And, sales per number of transactions. MAINTAIN PROFESSIONAL SKEPTICISM Identifying potential fraud requires application of skepticism when looking at financial data. However, many accountants have no specific training in fraud investigation and as a result may be ineffective in applying skepticism for the purpose of uncovering potential fraud. Also, when an accountant sees essentially the same types of reports period after period, they may not notice changes that have gradually occurred and which could indicate potentially fraudulent activity. The managing partner or law firm administrator should discuss this issue with their accountant. Or, they could consider bringing in an outside consultant to evaluate fraud detection procedures already in place and offer suggestions for new detection methods. Awareness of the potential for fraud is the key to detection. A NOTE FOR SMALL LAW FIRMS Many small businesses will not have the data capabilities, information availability or resources of larger businesses. They may avoid the immediate costs of steps to avoid and identify potential fraud. Yet, a significant loss due to internal fraud at a small company can be devastating. Small law firms should also discuss employee dishonesty insurance coverage with their insurance agent. Most commercial insurance policies include little, if any, employee dishonesty coverage unless it is specifically requested. Fraud prevention is an important issue for management and for anyone advising management. This includes the business attorney. By analyzing relevant relationships within financial data, brainstorming about areas of the business subject to fraud risk, and retaining a level of professional skepticism with financial information, finance professionals can provide a meaningful role in the prevention process. Joe Epps is a CPA and CFE with over 30 years of experience in forensic accounting. His litigation support experience includes contract disputes, anti-trust, 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.
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