Reagan Accounting & Consulting Group, P.C.

IT IS SAID THAT, "AN OUNCE OF PREVENTION IS WORTH A POUND OF CURE." When it comes to fraud, an ounce of prevention can be worth your entire business. So, what is your business worth -

to you?…
to the honest employees who depend upon it for their family incomes?…
to the customers who depend upon its products or services?…
to the companies that supply it with goods and services?…
to your children who may hope to one day inherit it?…

The Association of Certified Fraud Examiners estimates that fraud in the U.S. is a $400 billion industry. The costs of fraud can be disastrous to you….and surveys indicate that matters are getting worse. Annual losses can be predicted to approximate $9 per day per employee, and in many cases, actual losses far exceed this amount. A fraud prevention program can be installed and maintained for a mere fraction of these costs.

The essence of fraud is deception; actually, criminal deception intended to financially benefit the deceiver. Estimates are that 75% of frauds go undetected, and many frauds that are detected go unreported. Financial fraud can be segregated into two major categories: financial statement fraud and asset misappropriation.

Financial statement fraud is designed to deceive users of financial statements. Such frauds are normally executed by the senior executive management of the company; in most cases, the CEO and CFO are both involved. Users of financial statements include bank lenders, other lenders, investors, or parties associated by various types of contracts. In all cases of financial statement fraud, the perpetrators convey fraudulent financial statements for personal gain at the expense of others.

Investors and creditors hope that financial statement audits will detect any fraudulent activity in a company's financial statements. However, when it comes to financial statement fraud, sometimes financial statement audits just are not enough. The audits are being performed, but the fraud is undetected. The obvious question to ask is, "why?". In some cases, it can be as simple as differing objectives between a financial statement audit and a fraud investigation.

The objective of an audit is to determine, through the application of generally accepted auditing standards (GAAS) and, in some cases, other standards, whether the financial statements are fairly presented in accordance with generally accepted accounting principles (GAAP) - the focal point is the financial statements and their conformity with GAAP, and the concept of materiality plays a major role. There are documented cases where auditors have performed their audits in full compliance with professional standards, yet a fraud existed, and it was not detected.

In a fraud investigation, the objective is fraud detection - the focal point is fraud….plain and simple. Fraud prevention procedures go far beyond the requirements of GAAS. For example, many frauds are detected from allegations or complaints of coworkers, coconspirators, customers, competitors, suppliers, or prospective suppliers. As a result, fraud prevention requires you to think like a fraudster and consider:

Where are the weakest links in the chain of controls?
How can controls be attacked without drawing attention?
How can evidence of the attack be destroyed?
What powers can the fraudster enlarge?
What plausible explanations can the fraudster give for suspected activities?
How can fraudsters, if confronted, explain their conduct?

When it comes to preventing fraud one must understand the fraud triangle.

The Fraud Triangle

	Motive - An immediate, unsharable financial need.
	Opportunity - The weak link in your internal control system.
	Rationalization - An employee's belief that a crime has not been committed.

Motive can arise from:

Living beyond one's means
High personal debt or poor credit resulting from:
- Financial losses, including margin trading on stocks
- Greed
- Gambling, drugs, personal relationships
- Undue peer or family pressure to succeed
A challenge to beat the system
Job dissatisfaction
Emotional instability

Opportunity can be both real and perceived. Potential fraudsters who think they will be detected rarely commit fraud. The real fraud opportunity can manifest itself in poor or weak internal controls within an organization. Frauds are generally unsuccessful in organizations with a strong system of internal controls and where employees are aware that these controls are in place to deter fraud. Fraud risk is heightened, however, when good control systems are overridden or circumvented by employees.

Fraudsters rationalize or justify their behavior as something other than fraud or theft. In the fraudster's mind, by rationalizing their behavior, the fraudster provides himself or herself with a morally acceptable excuse for their crime. Rationalizations can include:

"I'm only borrowing this money; I'll pay it back."
"I'm not really hurting anyone."
"This is the bonus I was supposed to get."
"I'm not stealing from the boss; it's company money."
"Everyone does it."

Do not let fraud derail your financial objectives. Let REAGAN Accounting & Consulting Group, P.C. design and implement an effective fraud prevention program just for you.

REAGAN Accounting and Consulting Group, P. C.
2117 Magnolia Avenue
Birmingham, Alabama 35205
Phone: 205-380-4200 | Fax: 930-9867
E-mail: info@reagan-solutions.com