Brainstorming for Fraud

Enron, Worldcom, Tyco, HealthSouth—all of these names have one thing in common, fraud. Huge accounting scandals and extravagant asset misappropriations have caused the business and accounting worlds to take a step back and examine their practices concerning fraud. Out of this observance came Statement on Auditing Standards (SAS) no. 99. With the implementation of SAS 99, brainstorming sessions on fraud are no longer an option. Under SAS 99 all auditors are required to conduct these brainstorming sessions on each engagement that they audit before actual fieldwork is entered into.

It must be remembered that fraud affects us all, not just large corporations. Dr. Thomas Buckhoff, a professor at North Dakota State University and inventor of the company Fraudwise, is one of the nation’s leading experts on forensic accounting and fraud. When asked about fraud in business, he said, “If there is cash flowing through a business, then there is fraud going on.” This is evident through some of the latest statistics from the “Report to the Nation” by the Association of Certified Fraud Examiners (AFCE). These are some of the findings:

• All occupational frauds fall into one of three categories: asset misappropriations, fraudulent statements, or corruption.
• Over 80% of all occupational fraud involves asset misappropriations, while cash is targeted 90% of the time.
• Fraudulent statements are the most costly form of occupational fraud with median losses of $4.25 million per scheme.
• Frauds committed by employees cause median losses of $60,000, while frauds committed by managers or executives cause median losses of $250,000. When managers and employees conspire in a fraud scheme, the median loss rises to $500,000.
• The most common method for detecting occupational fraud is through tips from employees, customers, vendors and anonymous sources. The second most common method of discovery is by accident.

By understanding these statistics, clearly we see why SAS 99 and brainstorming for fraud are so important. The sessions can be any particular length of time, but a good limit may be about one hour. This allows for enough time to freely exchange ideas, get feedback, and discuss the important issues, while keeping everyone involved and interested. The following ideas are good points to remember during your brainstorming sessions.

• The partner or manager on the engagement should start by informing everyone involved to voice any and all suggestions that they may have. No comment should be regarded as absurd or off the wall. The better the variety of comments, the better the understanding of all potential avenues for fraud.
• Remember that auditors face difficulties in assessing fraud risks because many of them have never encountered a material fraud during their careers.
• If team members experience problems identifying potential fraudulent risks, provide them with a little explanation. If you were a bookkeeper of the entity, how could you embezzle fund and not get caught? If you worked in a warehouse with inventory, how could you steal it and cover it up? These questions will get the minds stirring and give insight into the type of ideas that are needed.
• The partner or manager should inform the group of the latest happening or occurrences that have happened since the last audit. These facts may cause employee incentives or pressures to commit fraud.
• It is important to get new team members involved. Even though they may have no first hand knowledge of the client, this is an excellent opportunity for them to become familiar with the industry and client in which they will be working on.
• With this group atmosphere, there will be those who will take over the discussion, and those that will let them do so. The team leader must me able to strike a balance to allow everyone to participate in the brainstorming.
• In order to expedite the exchange of ideas, have team members be planning a few days in advance. This does not necessarily mean taking a lot of time and effort, but can simply be accomplished by formulating some ideas during their day-to-day activities.
• Most importantly, remind the members to remember these ideas while performing their work at the client’s site. The sessions mean nothing if the information is discarded from their minds once the meetings end.

With the technological inventions that are rapidly affecting the way we conduct business, fraud becomes more and more of a factor. Since the majority of fraud involves cash, it is extremely important for auditors of banks and other financial institutions to become familiar with the risks that are out there, since after all, a banks primary asset is cash. This cash can be transferred without ever picking up a dollar bill or writing a check. The auditor’s job is a difficult one, and that is where SAS 99 will be most beneficial.

For more information please refer to the following websites:

www.aicpa.org
www.cfenet.com

Contact Nichols, Cauley & Associates by Email, phone, or online form with your questions.

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