An essential guide for practitioners on avoiding unethical situations in a fraud investigation—provides tips, techniques, and real-life examples
Credentialed accountants, auditors, and fraud examiners who fail to identify fraud and misconduct may be in violation of their professional standards. Among these standards are requirements to exercise professional and moral judgment, act in the best interest of the public, maintain integrity, objectivity, and independence, render opinions based on evidence and documentation, and exercise due care in planning and discharging professional activities. Failing to adhere to professional standards and ethical codes have serious consequences for CPAs, CFEs, and CIAs engaged in fraud investigations. Fraud helps readers avoid unethical situations in fraud investigations and stay within the boundaries of professional guidelines and standards.
Author Jeffrey Matthews combines real-world techniques and practical advice with personal insights from his experience as a forensic accountant. Detailing how he faced death threats, retaliation, and family hardships during actual fraud investigations, the author shares how despite serious challenges, he never deviated from professional standards. The author demonstrates how accountants can avoid being caught in unethical practices and examines the common tendencies that hinder the ability to detect, deter, and prevent fraud and misconduct. This fascinating, highly-relevant book will help practitioners:
Recognize current and emerging trends to identify new areas of weakness
Address time and budget constraints with effective delegation and supervision of lower-level staff
Maintain a healthy dose of skepticism by 'testing not accepting'
Understand the effort and expertise required to perform an investigation before accepting engagements
Avoid establishing biases and pre-determining outcomes before accepting assignments
A full-featured resource, complete with PowerPoint slides and a test bank, Fraud is invaluable for auditors, accountants, and other certified fraud examiners.
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A – Someone who solves a problem that you didn't know existed, in a way you don't understand.
IN THIS CHAPTER, WE discuss the landscape of the global ethical environment, and then establish the professional standards that help address the dilemmas that arise out of fraud and misconduct. We compare financial statement audits and fraud investigation from the perspectives of auditors and fraud examiners.
FRAUD IN THE PRESENT AND PAST
I challenge you to grab a periodical. A newspaper (if you are still able to stomach the news). Scan it. How many articles mention fraud or misconduct? I would be willing to wager each issue has a few. I would also be willing to bet that each victim represented in the article strongly felt that “it could never happen to us.” We, as accountants and auditors, are not immune. We are lulled into a false sense of security, and feel that our clients or companies “are better than that.” This is very apparent in recent studies on the impact of fraud on small business. In fact, the Association of Certified Fraud Examiners 2018 Report to the Nation showed that small organizations with less than 100 employees are mostly likely to suffer from occupational fraud (28% of cases) and suffered the largest median loss (USD 200,000).
It can happen to you. I know, because it happened to me. I am a life-long mixed martial arts fan. While I have never had the time or the ability to fully immurse myself into the sport, I have done my fair share of sparring and training. In 2016, I was awarded several prime territories to open Ultimate Fighting Championship (UFC) Gym franchises. My first territory was near my home in Flower Mound, Texas. My second was in the Lakewood suburb just four miles east of downtown Dallas. I had the absolute best management team at my Flower Mound location. I had challenges in Dallas during the presale and our soft-opening periods. The president of the UFC Gym Corporation and others within management referred a candidate to me. Unbeknownst to the president, I had interviewed the candidate before, and declined to present him an offer. There were certain things in his background that concerned me. Nonetheless, I was in a tight spot, and regardless of the candidate's background, he had an impressive membership sales record. Upon the president's strong recommendation, I hired the candidate at a very favorable wage. And boy, did he sell!
The candidate led the region in sales nearly every period for six weeks of his employment. He terminated historic underperformers and removed other negative influences. I could not have been more pleased with the direction of the gym … until I received the first bank statement. I saw that no cash had been deposited. I called him immediately. He told me the cash was in the safe, and he simply had not had the time to visit the bank. He assured me it would be taken care of that day. I trusted him at his word and went back to my busy world of forensic accounting, litigation consulting, and, of course, teaching.
A few days went by and I checked the bank account again. Nothing. I placed another call. He told me he was actually on his way to the bank just that minute. “Great.” I said. “Please send me a copy of the deposit slip.”
“Of course!” He quipped. I heard nothing that day and saw no deposit. It was two days away from our grand opening.
The very next day, I called to confront him. A week had now passed and I had seen nothing. As he began his excuses, I stopped him immediately, asked that he meet me at the gym, and said I would make the deposit myself. He agreed … and called a few moments later to resign, saying “the job was simply too stressful.” Well, it was about to become much more stressful for this deadbeat.
FIGURE 1.1 Duration of a fraud and median loss.
Source: Based on data from ACFE 2018 Report to the Nation.
The safe was empty. No checks and no cash. We immediately began reviewing the security cameras (which are highly effective, if you are able to monitor them by the minute). We saw him regularly pocketing cash, as well as giving his girlfriend cash. I was crushed. However, considering the commissions and monetary incentive awards he forfeited, it was not a huge loss for me, and the scheme was halted after a few weeks. I turned everything over to the police, who as you can imagine were not all that enamored about pursuing my small loss. All in all, I survived, but I was embarrassed. It could have been much worse, as it generally is for so many.
While I was able to stop the fraud within a few weeks, that is not the case for most. Every two years, the Association of Certified Fraud Examiners completes a global study on occupational fraud and abuse. In their 2018 Report to the Nation, the ACFE found the median duration for all the fraud cases was 16 months. And obviously, as shown in Figure 1.1, the longer a fraud goes undetected, the larger the scheme will grow and the higher the loss will be.
The ACFE also examined the duration of the cases reported, based on the type of scheme involved (see Figure 1.2). Payroll schemes lasted the longest, at 30 months, whereas register disbursements, the scheme that plagued my gym, lasted six weeks. So I at least had that working for me!
FIGURE 1.2 Duration of different occupational fraud schemes (in months).
Source: Based on data from ACFE 2018 Report to the Nation.
FIGURE 1.3 Percentage of perpetrators having prior fraud convictions.
Source: Based on data from ACFE 2018 Report to the Nation.
And while my fraudster had prior history, another interesting fact from the 2018 Report to the Nation is that the vast majority of occupational fraudsters had no prior history (see Figure 1.3).
In fact, only 4% of the perpetrators in the study had previously been convicted of a fraud-related offense (see Figure 1.4). It was saddening to learn that some 40% of fraud cases are never reported to the police. However, it is understandable. Many companies fear the bad press that often accompanies a criminal or civil matter. Others simply feel it is not worth the cost or that a recovery is unlikely.
FIGURE 1.4 Percentage of perpetrators’ prior employment-related disciplinary actions of fraud.
Source: Based on data from ACFE 2018 Report to the Nation.
FIGURE 1.5 Comparison of fraud losses in small and large businesses.
Perhaps the most provocative finding revealed in the study was the victim organizations themselves. Facts show that small organizations, those with fewer than 100 employees, experienced the greatest percentages of cases and suffered the largest median losses at $200,000, almost twice as much as the median loss larger organizations with more than 100 employees suffer. The graph in the ACFE 2018 Report to the Nation (see Figure 1.5) visually summarizes fraud statistics compared between small and large organizations.
I equate the disproportionate share of losses within small businesses to three common themes:
Trust. Whether the business is family-owned or a new start-up, it is entirely possible that management knows each and every employee. With that familiarity comes trust. And as we will learn, trust alone is a terrible control.
Lack of resources. Resources can consist of people and money. Small companies may find it challenging to adequately segregate critical duties, or invest in external audits (that are often not required).
Lack of controls. In addition to lacking resources, small organizations may lack the knowledge to implement adequate internal controls. It is very difficult to monitor controls that aren't there.
Additionally, I typically see more emotion when fraud is discovered at small organizations. Whereas in some cases involving fraud at large companies, perpetrators c...
Table of contents
Cover
Table of Contents
Preface
Introduction
CHAPTER 1: F – Forgetting the Present and the Past
CHAPTER 2: R – Relying on Others
CHAPTER 3: A – Accepting, Not Verifying
CHAPTER 4: U – Underestimating the Effort
CHAPTER 5: D – Determining the Outcome Before the Work
CHAPTER 6: Overcoming Barriers to Reporting Fraud and Misconduct
