Forensics Journal - Stevenson University 2014

STEVENSON UNIVERSITY that project (Noyes 10). Many times visual observations can alert an auditor or owner to fraudulent acts. As described in the Baker Tilly case above, on-site auditors were able to note that substandard materials were being used on the job and not as much waste as predicted was being generated by the project (“Construction Fraud: Stories”). Auditors should examine how many people are working on the job site and compare that to the daily payroll records (Noyes 10). This will help detect if the owner is being overbilled for labor costs. On-site audits operate as effective internal controls and should be utilized to detect and prevent fraud. could suggest that improper techniques are an acceptable means to reach a desired result. Managers need to find a way to motivate their employees to help the company perform well while emphasizing ethical business practices. Pressure and stress should not blind staff members from being able to discern right from wrong. Many owners assume they can avoid fraud by simply hiring the right individuals to run their company. While it is vital for a successful company to hire dependable and trustworthy workers, executives should never assume their employees are incapable of deceitful acts (Roberts). As noted previously, the majority of offenders have never committed a criminal act prior to their fraud (“Report to the Nations”). Even if the background search is negative for questionable behavior and no prior employers complain of deceitfulness, the interviewee is not automatically immune to engaging in fraud. It is necessary to develop a level of trust throughout the organization, but management needs to be wary of placing too much responsibility in the hands of one trusted employee (Roberts). In order to guarantee that no one individual has enough authority to override controls, there are some guidelines to put in place. Requiring all employees to take their vacation can help deter fraud (Roberts). Employees who never take a vacation are often afraid that their fraud will be uncovered if they are away from work for too long. Another way to prevent employees from committing fraud is to segregate duties within the organization. The methods described above are some of the many detection tools and techniques owners, auditors, employees, customers, vendors, and suppliers can utilize to uncover fraud. However, the easiest and most effective way to combat fraud is to prevent it before the scheme begins. The ACFE recommends that of all the prevention techniques available to business owners, the most critical to implement is “targeted fraud awareness training” for all levels of employees (“Report to the Nations”). This training should be mandatory and should be conducted at least once a year. During the training, fraud should be defined with specific examples related to the industry of operation (“Report to the Nations”). Upper management is responsible to ensure the rules are understood throughout their organization. The fraud training should also cover how fraud is destructive to everyone within and around the entity (“Report to the Nations”). First-time offenders may believe they are actually helping the company when they falsify the financial statements in order to make results look more favorable. However, they need to understand their actions are directly harming potential investors, bankers who rely on financial information to approve the company for loans, and the future of the entire company when the fraud is eventually discovered. Lastly, the training should articulate how someone can disclose suspicious activity to the appropriate source (“Report to the Nations”). This would be an ideal time to mention the whistleblower hotline if one is in place or direct their complaints to another objective source such as the independent auditors, the Board of Directors, or even the Securities and Exchange Commission (SEC). The training will serve as a solid base for preventing fraud throughout the company and will help ensure everyone is following the same ethical guidelines. At a minimum, “the responsibilities of authorizing transactions, recording transactions, and maintaining custody of the related assets” should be separated amongst different employees (“Auditing: CPA Exam” A3-52). The more processes that are segregated in a single transaction, the less risk exists that a fraud will be concealed. This is especially important for the construction industry concerning materials fraud. One person should be responsible for approving material acquisition forms, another person should be in charge of recording those purchases on the books, and a third person should be held accountable for receiving the materials. At each step in the process, a new person is checking and reviewing the transaction to make sure everything appears correct. Similarly, the cash receipts process should be split between those who collect the payments and those who record the payments in the system (“Auditing: CPA Exam” A4-26). Segregating duties can be difficult in smaller businesses where there are fewer people to carry out complex transactions. This is one of the main reasons small businesses are more susceptible to fraud and need to take even more actions to protect their company (“Report to the Nations”). Oversight is also an important duty to implement in every accounting process. Giving one person sole authority to approve all purchasing activities leaves the company vulnerable to overbilling and kickback schemes (“Occupational Fraud”). Companies should consider using double approvals for large purchases or rotating the approval duty. In order for employees to be willing to follow the ethical guidelines established by management, they must have strong leaders to set an example. The tone at the top sets the precedence for all those on the lower rungs of the corporate ladder (“Preventing & Detecting Fraud”). The idea is that the morals and values of the top executives will trickle down to be reflected in their subordinates. Conversely, if the top executive behaves unethically, his subordinates

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