The massive scale on which fraud is being committed both in the public and private commercial sector seems to have caused some major shake-ups including that by the Mayor of London, Boris Johnson. His recent decision to appoint a forensic audit panel to delve into the inner workings of the GLS and LDA will certainly serve to add a sense of greater transparency to his office. But is it enough? How have amounts that run into millions and sometimes billions simply been siphoned off of the books of certain organizations and rerouted without anyone, particularly auditors, noticing? Who is asleep at their station? And, what role can forensic auditors play in the prevention or early detection of these crimes? These are questions that still baffle the man in the street and the many victims of this type of fraud. One does not need to be a financial wizard to know that there are people in responsible positions who are simply taking their eye off the ball, and it is usually the boss.
Financial fraud involving a significant sum of money is usually committed over a period of time; sometimes over decades, and it is usually due to slack internal controls. It is also more likely to be uncovered by chance than by an auditing process. Most cases will involve an employee who has been with the organization for a lengthy period of time and is trusted to perform most accounting functions, and this is where complacency sneaks in on the part of employers. Although controls regarding separation of duties may initially have been in place an employee who has performed well over time and displayed loyalty and commitment is likely to encroach on the duties of others without raising any suspicion. Any employee who is able to control incoming funds, outgoing funds, and the reconciliation of bank statements has the potential means to manipulate the system. A friendly familiarity will also most likely exist in the relationship between this employee and a regular auditing team which is far more likely to encourage an auditing oversight. ‘Familiarity breeds contempt’, applies as much to relationships between people as to the attitude of an employee who has developed a sense of indifference to a job that is no longer challenging. What must also be borne in mind is that a routine audit involves spot-checking and not an in-depth examination of financial transactions. What then can be done to prevent such apathy, and what role can forensic auditors play in the meaningful implementation of proper controls?
Forensic auditors possess not only a sound knowledge of accounting and auditing, but are skilled investigators as well. Many large corporations will routinely employ their services to ensure that the company is running at maximum efficiency and that all protocols are being followed. The forensic team will examine the company’s financial records and also any contracts, tenders or other financial agreements and all of the relevant underlying circumstances. Transactions will be tracked from beginning to end, and any discrepancies will be noted and reported. Calculations will be done; conclusions drawn and recommendations made to tighten up where any potential for fraud may exist. A final report will be compiled and presented to management for consideration. Forensic auditors may also be asked to suggest ways in which interaction between leadership and staff can be optimized to promote loyalty and transparency. It is of course then up to management to determine how stringently these recommendations will be applied.
There are many common factors to be found when researching fraud and probably the most significant of these is opportunity. If checks and balances are in place that restricts an employee’s access to funds, then this is far less likely to occur. It has also been found that most companies falling victim to fraud are reluctant to report the incidents to protect the company’s image and integrity, yet without threat of prosecution dishonest employees will be far more likely to grab at any opportunities that present themselves. It is also of critical importance that a clear line of communication is maintained between staff and management, and a proper forum is available to air grievances. People in charge of any such forum should be properly trained and adept at handling upset staff. It is essential that would-be whistle-blowers feel completely at ease regarding confidentiality issues and confident that the matter will be appropriately addressed. At the end of the day it is the observance of some simple rules that will either cost a company vast sums of money or allow it to prosper.