Fraud Audits, Fraud Deterrence and Forensic Accounting
The factors that make it more likely that fraud will occur in a business include the easy temptation of size and value - if items are of high value in proportion to their size (such as cash and petty cash, diamonds and precious metals), it is easier to remove them from the premises. If there is a ready market for the resale of stolen goods, there will be an increased temptation to engage in fraud. If there is a large amount of cash in bank accounts, there is a high risk of fraud, e.g., a trusted, long-time employee can transfer funds out to another back account.
The factors that prevent fraud are always the separation of duties causing the risk of fraud to decline dramatically if multiple employees are involved in different phases of any transaction; however, this can be defeated by collusion of at least two people. It makes perfect sense that poorly-defined job descriptions and approval processes present a clear opportunity for fraud. When assets are physically protected, they are much less likely to be stolen. When there is no record of a transaction, employees can be reasonably assured of not being caught; therefore, their objective will be to destroy any evidence. Think of a vendor who destroys their information and has access to the accounting department files when the door has been left unlocked at night. A business should require all employees to take the full amount of vacation time off as a natural deterrent - many have been caught during there absence since they were not there to cover their tracks - this is a natural deterrent since stops them from continuing to hide ongoing cases of fraud. When any single individual is in a position to fire any employee for any reason, that individual is most likely to engage in fraud. When there is a high level of turnover among the most loyal employees, the institutional memory regarding how transactions are processed is weakened, resulting in less attention to controls. When there is no internal audit function, there is no deterrent and it is unlikely that incorrect or inappropriate transactions will be spotted or corrected. If the work force is unhappy with the company, they will be more inclined to engage in fraud especially when a layoff is imminent, benefits have been reduced, bonuses have been eliminated, and/or promotions have been voided. When there is pressure to perform and meet targets, e.g., to earn bonuses, there is a risk of financial reporting fraud. When the owners and/or management have guaranteed company debt, there will be strong pressure to misreport certain financial results. When you hear damaging gossip, don't accept it blindly as most ignorant people do - consider the source's objective, ignore it or verify it. When you walk down the hall and you see a lot of crooks all the time, notice who they are visiting - the crooks are not there for a quilting party. When you go to church and you see a lot of people that you know for certain are crooks, they are not praying; they are preying. You will have recognized and identified at least one of their many strategies to distract attention away from the waving red flags. When management refuses to establish internal controls, then you know they are most likely part of the fraud; so, be forewarned.