ACCOUNTING FIRMS NEED TO BE ON GUARD FOR EMPLOYEE FRAUD
Any enterprise with employees can be victimized by employee fraud, even accounting firms. Moreover, given the ever-expanding role of accountants, they often have access to clients’ money. It could be that the firm is serving as a "family office" or that the firm has access to a client’s checkbook or online banking for bookkeeping purposes. Whatever the situation, once an accountant has access to another’s money, the situation is rife with risk. Of course, you will never succumb to temptation, but you have employees and staff that may not be so morally, ethically or legally observant.
It is estimated that the average organization loses five percent of revenue due to workplace fraud. This can take the form of exaggerated expense reimbursement, invoice forgery or plain old embezzlement. While most wrongdoers come from the employee ranks, managers and even owners have been known to have committed workplace fraud.
An accounting firm environment offers two opportunities for workplace fraud to occur. The first is traditional workplace fraud found in almost every employment situation, i.e., embezzlement from the employer. The second is due to the firm’s unique position in managing its clients’ financial affairs. Though technically not workplace fraud, when an accountant embezzles from clients, many of the same indicators are present and many of the same risk management strategies are effective.
ENVIRONMENTS RIPE FOR EMPLOYEE ABUSE
Although any workplace may be the victim of employee fraud, those with certain characteristics are more likely to be abused than others. Obviously, cash-based businesses are the most likely to see low-level employee dishonesty. However, for the most part, accounting firms are not cash-based businesses. Nonetheless, they can be victimized. For example, employees may use firm resources to pursue personal engagements, i.e., moonlighting. Use of firm resources is not only theft from the firm but also exposure of the firm to potential liability for work it was not even aware was being performed. In addition, false invoicing, especially in the technology area, is a common source of theft from accounting firms.
Across all enterprises, the most common characteristic of workplaces victimized by employee fraud is a lack of internal controls. Put another way, those workplaces that have not examined their internal controls and implemented well-thought-out plans are more likely to have instances of employee theft.
For accounting firms, this also applies to engagements where there is a lack of supervision or control over the actions of staff who deal with clients. In one such case, a staff accountant was tasked with servicing an elderly client, which included helping the client to pay bills.For years, the relationship was uneventful with only routine increases in fees. However, the firm never exercised oversight of the staff accountant’s actual activities. After all, it was a fairly modest engagement with little complexity. Upon the client’s death, the family discovered that the accountant had surreptitiously been paying her own credit card bill with the elderly client’s checks. The lack of internal controls over the staff accountant created a situation that permitted abuse of a client’s trust, financial exposure for the firm and a potential catastrophic loss of reputation in the community.
POTENTIAL RED FLAGS
Although employees that defraud their employers come in all varieties, certain "red flags" have been observed in multiple employee theft cases. Not surprisingly, one of the most common indicators of employee dishonesty is an employee who is living beyond his or her means. Fancy cars, nice cruises and outsized homes can all be indicators of unearned income. Rarely do perpetrators of workplace fraud put their ill-gotten gains in index-tracked mutual funds or T-bills. The money goes toward extravagances and is often difficult to hide.
Problems with drugs and gambling also can be indicators of workplace fraud. The urge to satisfy a drug habit can easily overcome the ethical and moral restraints placed on employees, and excessive, not casual, gambling is another telltale indicator. In one case, a low-level bookkeeper was being picked up at the office on Fridays by a limo sent by a casino. Such events should give pause to those responsible for financial security.
In addition, centralizing financial responsibilities with one person or two very close people is a typical scenario that leads to employee fraud. Similarly, employees who refuse to take vacations or otherwise seek to keep others from handling their assignments are common hallmarks of employee fraud. However, this behavior could be evidence of high motivation or dedication; no one indicator is a guaranteed "tell" concerning employee dishonesty.
RISK MANAGEMENT STRATEGIES
Risk management for workplace fraud can fall under three categories: preventative, discovery and mitigation. The most effective preventative measure is well-publicized, documented internal controls. Establishing a policy of requiring two signatures on checks, two levels of approval for expenses and periodic inspections can be very effective in preventing workplace fraud all together. Of course, allowing such well-thought-out internal controls to be overridden significantly undercuts their effectiveness.
Studies have revealed that there are very effective means of discovering workplace fraud. It is important to remember that standard GAAS audits are not designed to uncover fraud (though if the auditors happen to uncover material misstatements, they should bring them to management’s attention). In fact, far fewer workplace frauds are discovered by outside annual auditors than through most other means. The most common way workplace fraud is discovered is through a tip. Thus, simply creating a tip line or tip email box is a low-cost, highly effective measure to promote the discovery of employee misconduct.
Additionally, spot-checks and routine rotation of staff are very effective in uncovering wrongdoing and preventing such conduct in the first place. Of course, a combination of measures diligently applied is more effective than any one particular risk management technique.
Ultimately, for any accounting firm, it is the "tone at the top" that sets the standard of behavior. If employees witness management ignoring sound accounting principles and internal controls, or if employees see management playing fast and loose with financial accountability, employees are more likely to cross the line into workplace fraud.
CONCLUSION
Every firm should be cognizant of the risks surrounding employee dishonesty against either the firm or clients. Sound risk management strategies should be implemented at all levels and periodically reviewed to determine compliance and effectiveness. The risk to an accounting firm is twofold: the initial loss can be significant, and the damage to one’s reputation can be irreparable.
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James Milleew
TOTAL DOLLAR MANAGEMENT EFFORT LTD.
Port Washington NY
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