Question

What investigative steps you would have taken to detecting fraud within an organazation?

Answer 1

Here is the Five-Step Approach:

1. Know the Exposures    

Step one halts most people because if you have no idea what can go wrong in your area, the rest of the strategy collapses.

Risk: Employees Misusing Accounts Payable Checks or Wire Transfers

Whether I am performing a tactical review of an area or discussing fraud-prevention strategy with executives, I always begin with a "What Can Go Wrong" list, in which I list potential perpetrators and fraud acts. Typically, my "What Can Go Wrong" documents for a particular area will list at least two or three dozen frauds stated in a single sentence or two. My lists typically do not elaborate the frauds to the extent you see above, but for our purposes here it was necessary for you to see some details about the frauds. For instance, I might state as follows: "The CFO forged checks made payable to himself or an entity controlled by him."

2. Know the Symptoms of Occurrence

The next step in the process is to list the symptoms, or what these frauds would look like in the books and records.

4. Be Alert for Symptoms and Behavior Indicators

In one particular embezzlement, for example, the husband was a trucker for the company, his wife an accountant. Warehouse and inventory operations were properly segregated from accounting, but the two were able to violate the company's controls when the husband stole goods from the truck because the wife was able to book false sales, then subsequently write them off as uncollectible to cover the inventory shortages.

If multiple people can thus circumvent a control structure, how are we as managers and officers supposed to prevent such a fraud? The answer is by committing yourself to seeking the symptoms of the fraud.

4. Build Audit Programs/Detective Processes To Look for Symptoms

Following are some audit tests/detective processes designed to catch the symptoms.

Show up at odd hours to a department that is reporting high overtime or payroll expenses coming in over budget; observe whether people are present performing work and compare that to the hours they report.

Review time reports for trends of steady, upward increases in overtime, particularly where there is no corresponding increase in output or sales.

5. Follow Through on All Symptoms Observed