By Kim Patterson, Industry Member Relations Coordinator

Auditors must be alert to the symptoms of fraud, despite constraints on resources and time limitations, a specialist told CPAs during a recent seminar.

Steve Hendrix, manager of special audit investigations for the Phillip Morris Corporation, delineated different kinds of fraud in his seminar “Designing Your Audit to Detect Fraud,” held during a meeting sponsored by the New York State Society of CPAs Manhattan/Bronx Chapter and the National Association of Black Accountants on Oct. 24.

Hendrix said auditors can be hampered in detecting fraud because potential defrauders have advance knowledge of an engagement. Generally, Hendrix said, fraud is committed by company people who are familiar to the auditor, and the higher up an individual is, the more the individual is at risk of becoming a defrauder.

Hendrix focused on what he called occupational fraud: the misuse or misapplication of an organization’s resources or assets. All cases have several things in common, he said. Individuals committing fraud have fiduciary responsibility, and the crime is almost always committed for direct or indirect personal financial benefit.

Occupational fraud can cost an organization its assets, revenue or reserves. Fraud can cost the average business approximately six percent of total annual revenue, at an average total cost nationally of $400 billion to $600 billion a year. Statistics show losses attributed to men are three times higher than those attributed to women.

Hendrix said many motives typically drive employees to commit fraud. These commonly include gambling debts, bad investments, drug or alcohol problems, family debt, extramarital affairs and their children’s education.

Hendrix recommends that CPAs attend fraud investigation classes. In the meantime, Hendrix said auditors should be observant, maintain professional skepticism and listen and focus on what people say, and should consider whether there may be different ways to perform a transaction.