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Do You Know Anyone Committing Fraud in Your Organization?

April 29, 2014

Research has demonstrated that one of the best ways to find fraud is to simply ask about it.

Has anyone asked you this question? As a board member or a member of senior management or even front line staff, our auditors are trained to ask you this direct question. Asking about fraud is part of generally accepted audit standards and auditors don’t like asking the question(s) any more than people like such direct inquiries.

Why do we auditors ask such a question? Believe it or not, research has demonstrated that one of the best ways to find fraud is to simply ask about it. Apparently, some people need to be prompted to share. They won’t naturally bring this up and seek to resolve it for a variety of reasons.

As a board member or organization leader, you should be prepared to be asked about fraud. You may also be asked if you have any knowledge of suspected fraud affecting the organization. Another typical question is to ask what the organization is doing to prevent fraud. For example, are your employees made aware of their responsibilities regarding ethical behavior?

One of my favorite questions is: if someone would commit fraud here, how would they do it? I have always found thinking about what could go wrong in an organization to be a particularly challenging and interesting activity. Of course, some people wonder if there is a side of me they do not know!

If fraud does occur in an organization, it can seriously weaken the organization’s financial health and put everyone’s job at risk. Even if the organization is financially able to withstand the fraud loss, damage to its reputation may be so great that its future ability to operate with the public trust is damaged beyond repair, again resulting in a loss of jobs. Fraud and its prevention is everyone’s responsibility and should be on everyone’s mind. Rather than dreading the annual audit fraud inquiry, this realization should make the auditor’s work a welcome test of the organization’s ability to continue.

How do you develop a fraud-prevention mindset? The easiest way is to take every daily activity, think about what could go wrong (intentionally or unintentionally) and ask what systems or processes are in place that attempt to minimize the potential. Most business activities (including not-for-profit businesses) fall into a small number of systems. These might be the following:

Sales – billing – receivables – cash collection
Purchasing – paying bills – cash disbursements

Let’s think of payroll first, since we are all involved in payroll as an employee. In a large organization one of the first questions is, how do we know we are only paying real employees? What is it that prevents a fictitious person from receiving a paycheck? Of course in a small organization, where everyone knows everyone this is not generally a concern.

What prevents an employee from being paid for more hours than they actually worked? How do we know that all employees are paid at the appropriate pay rate? How do we know that all voluntary deductions (such as 401K) are remitted in a timely manner and in the appropriate amounts? If someone were to commit fraud in the payroll area, how would they do it? The questions actually come fairly easily once you stop to think about the process.

In the sales – billing – receivables – cash collection cycle, some of the questions that come to mind are: Are we being funded for every service we are providing? Are we billing for every service provided? Are we collecting the appropriate co-payment for each service rendered? Is the billing entering our receivables system so that we can track that we have been paid? Are all payments being deposited into the organization’s bank account? If someone were to commit fraud in the billing, cash collection area, how would they do it?

Finally, let’s think about the purchasing – bill paying – cash disbursements cycle. Some of the easy questions to ask might be: Are we only purchasing items that we really need? Are we receiving everything that we have purchased? Are we paying bills only for items (and services) actually received. Are we paying the correct amount? What steps are we taking to make sure we do not pay a bill more than once? If someone were to commit fraud in the purchasing and cash disbursement area, how would they do it?

Of course, these are not the only areas where fraud can occur but some of the most likely of places. These questions should help you to start thinking about fraud and ways to prevent it happening in your organization. Simply asking about fraud has been found to be one of the most effective ways of discovering it. Asking simple questions such as the ones suggested above will also guard you against fraud. Call us for additional help protecting your organization from fraud.

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