As you may be aware the week of November 12 – 18, 2017, is Fraud Awareness week. It comes with a kicky little icon to make us aware of fraud. In our society, we have October as Breast Cancer Awareness month, Red Ribbon week at the end of October to make us aware of drug abuse, and the list goes on. Well, fraud has now reached the level of a disease and or epidemic. Fraud is found in all businesses, from the small, personal service company, and the mom-and-pop retail store, to manufacturing companies.
In this post, we’re focusing on two types of fraud:
- Financial and
- Misappropriation of assets.
Fraud is committed when you have motivation (not usually controllable), justification (limited control), and opportunity (definitely controllable). As an owner or executive of your business, you need to implement controls. That is what you do, increase the assets, limit the liabilities and protect what you have. Ask yourself, do you have internal controls designed to protect your assets? Most of you will say yes, but are those controls documented?
How does financial fraud occur? Here are a few of the common areas of financial fraud:
- Inflating assets on your financial statements,
- Not disclosing liabilities,
- Including off-balance-sheet liabilities,
- Recording consignment inventory as yours, and
- Not disclosing obsolete or non-saleable inventory.
Misappropriation of assets is such a nice, professional term for such a very, unprofessional activity. Stealing occurs at all levels of a business, from someone taking the unused extra rolls of toilet paper, to valuable inventory, equipment, and yes, cash.
Fraud is everywhere!
Now that you are aware it is Fraud Awareness week, what can you do? You may say, unlike breast cancer or drug awareness, no one is asking me for a donation? Actually, you may be wrong. No one is asking you for money to prevent fraud; but, you will need to invest time, and yes, money for your company to design controls to protect assets that you and your staff have worked so hard to establish. No, I am not suggesting that you hire a bathroom monitor to keep those precious rolls of unused toilet paper from disappearing; but, you may want to consider that as a charitable donation.
You may have internal controls and you may have them in writing; but, when were they last updated? Innovation is changing how we work at an amazing pace, controls must change with it.
Actions you can take today:
- Try speaking with everyone you meet in your day. You may not be aware who the toilet paper thief is, but you can bet his coworkers do.
- Walk around your manufacturing plant. Let your presence be known. Ask questions – why, who, and where, helps in investigative writing.
- Don’t shoot the messenger when an area of fraud is made known to you. Don’t say “How did you let this happen.” Rather, ask “How can we prevent it in the future?”
- Look at your bonus incentive plans. Do any of them give undue motivation to enhance the bottom line, i.e., they are not attainable without committing fraud.
- Make sure that there is cross training actively in place, no one should be indispensable.
Avoid making the mistake that your company’s annual financials are audited by an outside accountant and he/she will let you know if anything is wrong. Here’s why.
- If fraud was detected, it has been detected after the fraud was committed.
- An audit of the company’s financial statements are not for the specific purpose of detecting fraud; but, to give assurance that the financials in all material respects are in accordance with U.S. generally accepted accounting principles (GAAP). That being said, as auditors we have the responsibility to design our audit to consider the entity’s internal controls. We also should issue a letter to inform management of inefficiencies that were found within those controls.
That is why there is a whole week allocated to fraud awareness.
LB Goodman & Co is qualified to audit your financial statements, as well as evaluate your company’s internal controls system and offer forensic services.