How's Your "Fraud Detector" Working?

A CPA firm partner shared a story in one of my seminars about his "fraud detector."  Invited to submit a proposal for an audit of a medium-sized non-profit organization, he arranged a meeting with the executive director.  After the meeting, the partner related that he had a "bad feeling" about the relationship.  The executive director had not appeared dishonest, evasive or unethical but something didn't feel right.  Raise your hand if you've been there!  Call it intuition, the auditor's "sixth sense" or psychic ability, the partner's fraud detector was working!

Deciding to investigate further, the partner employed his ultimate fraud detection test; he invited the director to play a round of golf!  At the end of 18 holes, the partner shook the director's hand and told him that his firm would not submit a proposal for the audit.  The reason? The director cheated on his score on every hole on the course!  Not just fun cheating either!  Moving his ball to the top of tufts of grass in the rough when he thought no one was looking, not counting strokes when his backswing hit a tree limb and not counting lost water balls were just a few of his habits.  The partner shared that these habits were a character flaw and that his firm could not afford to be associated with such a client.

A few months later, the partner's wisdom paid off.  Headlines in the local newspaper revealed the executive director had been found guilty of embezzling thousands of dollars from his organization!  His character flaw was just the tip of the iceberg!

Many frauds, large and small, have been missed because auditors are too busy performing procedures.  SAS No. 99 instructed engagement teams to hold "brainstorming" meetings to identify fraud risks.  Sadly, many frauds have occurred and gone undetected in spite of these meetings.  Why? Some believe that after the first year that the meetings have become routine and our fraud detectors are desensitized. 

I don't know about you, but I can't shut mine off!  At the fast food store when the clerk doesn't ring up the sale, at the toll booth when I'm not offered a reciept, when a CEO pays for personal lunches with a company credit card, when friends pad their expense accounts and on and on.  Experience has taught most of us old auditors to wear our professional skepticism on our shirt sleeves!  If it looks like a duck, walks like a duck...you know.  How's your fraud detector?

 

 

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by Larry Perry, CPA, CPA Firm Support Services, LLC - Larry has over 40 years experience as a CPA practitioner, author of accounting and auditing manuals, author and presenter of live staff training seminars and author of webcast and self-study CPE programs.  He is co-founder of CPA Firm Support Services, LLC (www.cpafirmsupport.com), an organization providing resources, training and consulting to smaller CPA firms.  Larry writes a weekly blog on AccountingWEB.com focusing on small audits, reviews and compilations.  He is currently developing documentation manuals and handbooks for small audits, reviews and compilations and related electronic practice aids.

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