Real Secret to Fraud Deterrence
Joseph T. Wells
JUNE 2008 -
If you were to ask a group of typical accountants what deters fraud,
they would respond in unison: “Internal control!” Using
this logic, companies with adequate controls would not have fraud.
But they do, time and again.
article explores the control dilemma in a different light.
a recent high-school graduate, worked in a photo kiosk in a
shopping mall parking lot. (This was before the advent of digital
photography.) After being on the job only a few weeks, she had
a small personal financial crisis. So she helped herself to
a bit of the cash in the company’s register, and then
a little more. To cover the thefts, Pam simply altered her cash
count sheet that she turned in every day. Her scheme came to
an abrupt end when an internal auditor conducted a surprise
visit and uncovered the shortages. According to Pam, “I
didn’t even know what an audit was before I was caught.”
She knows now.
- A school
district was having problems with students fighting, harassing
drivers, and otherwise misbehaving on the buses. Without saying
a word to the students, the district installed a video camera
at the front of the vehicle to catch the miscreants. The children
quickly spotted the unblinking eye and stopped acting up. But
because the school lacked funds to install video cameras on
every bus, it installed fake cameras on the rest of the buses
as an inexpensive deterrent. The idea worked.
- A clerk
in a major corporation was aware that a high-volume checking
account had not been reconciled in three years. In her distorted
thinking, she assumed that it never would be. But when it was,
auditors found that the clerk had forged a check for $67,000
and deposited the proceeds into her own account. She was fired
dissimilar illustrations have important factors in common. In
the two accounting cases, there was never the opportunity to commit
and conceal fraud; only the perception. In the school bus example,
there was a real chance to engage in misdeeds, but the students
were held in check by their perception that they would be caught.
So it is
not internal controls per se that deter fraud, but the perception
that unlawful conduct will be detected. Simply stated, the perception-of-detection
axiom is as follows: Those who believe their illegal activity
will be detected are less likely to engage in it.
is hard to fault. It also explains why the threat of punishment,
no matter how severe, rarely deters crime. In the deliberate thought
process of a white-collar criminal, the first question in the
potential offender’s mind is not, “How much time will
I serve if I’m caught?” but rather, “Will I
be caught?” If the answer to the second question is “yes,”
the crime is much less likely to occur. The next obvious issue
is how internal auditors can increase the perception of detection.
a higher stance. Although auditors are an organization’s
bellwether for good corporate conduct, many employees don’t
know what they do. It is critical that workers be aware that auditors
are, among other things, actively looking for fraud and abuse.
Ask the tough questions. There are two ways to uncover fraud:
stumble over it, or seek it out. Although analytical techniques
and audit procedures may sometimes point in the right direction,
they are no substitute for allowing honest employees to be an
auditor’s eyes and ears. Do not hesitate to ask employees,
in a nonaccusatory way, what they know or suspect.
hide internal controls. Employees can’t be
dissuaded from committing fraud if they are not aware that internal
controls are there to catch them. It greatly aids deterrence if
workers perceive that there are control mechanisms in place. If
there aren’t controls in place, this fact should be kept
quiet. Remember, we’re talking about perception.
T. Wells, CFE, CPA, is founder and chairman of the Association
of Certified Fraud Examiners, Austin, Tex. He is a member of The
CPA Journal Editorial Board and can be contacted at jwells@ACFE.com.
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