2019 Fraud Update
As accountants itâ€™s important to keep current on trends of fraud in the industry. As I have traveled around the country teaching a continuing professional education courses for CPAs, CFEs, CIAs, CMAs, and other individuals in the accounting industry Iâ€™ve surveyed the accountants and the results of those surveys indicate that one of the main reasons that accountants arenâ€™t good at detecting fraud is that theyâ€™re too honest. Unfortunately, most individuals in the accounting industry either working in an accounting department or as auditors donâ€™t think like criminals. Because of that it can be difficult to detect the red flags or other indications of fraud.
It is important that we understand why criminals might commit fraud and look at a couple of the fraud theories that have been developed over time. Gabriel Tardeâ€™s theory of differential reinforcement indicates that criminals commit crimes because their behavior is reinforced with positive rewards. In other words if theyâ€™re able to successfully commit the crime and not get punished theyâ€™re going to do it again. Dr. Edwin Sutherlandâ€™s theory of differential association indicates that criminals learn how to commit fraud by associating with other criminals who committed the crime in the past. The social learning theory combines components of the theory of differential reinforcement in the theory of differential association to show what motivates criminals to commit their crimes. The most well-known theory for why people commit fraud is Dr. Donald Cressyâ€™s fraud triangle. The fraud triangle has three components; pressure, opportunity, and rationalization. When all of these elements are met individuals are able to cross the line and commit fraud.
Common sense tells us we want to have internal controls in place to help to prevent and detect fraud. When reviewing accounting transactions or auditing we want to be aware of the red flags for fraud. This can help to reduce losses for fraud which the Association of Certified Fraud Examiners estimates to be over $7 billion annually. This equates to approximately a $130,000 per fraud scheme. Eliminating these losses would be beneficial to any organization.
In order to put good internal controls in place itâ€™s important to understand the various fraud schemes that criminals use to misappropriate assets and hide their illegal activities. The three types of occupational fraud are; asset misappropriation, corruption, and financial statement fraud. When criminals steal assets or act in a corrupt manner, they often cook the books to conceal their illegal activities. Many times we find that the various types of occupational fraud often overlap. So discovering an inappropriate journal entry could not just be a sign of financial statement fraud it could also be an indication that the fraudulent journal entry was used to cover up corrupt activity or misappropriation of assets.
When conducting a risk assessment or fraud in an organization it is important that we consider some of the classic frauds such as skimming, lapping, and counterfeit currency. It is also important to look at some of the newer frauds such as phishing, ransomware, vishing, spyware, and other cyber frauds. We need to consider the opportunities for fraud that could be committed by our employees, our customers, our vendors, regulators, competitors, and other individuals or organizations. No business is safe from fraud and thereâ€™s no magic pill they can keep a business from being a victim of fraud. Keeping up to date on current fraud schemes and refreshing your memory on the classic fraud schemes is important for any individual in the accounting industry.
The upcoming 2019 Fraud ReviewÂ webinar and self-study course were designed to help individuals in the accounting industry keep up-to-date on various fraud schemes while obtaining CPE credits.Â Both programs were specifically designed to meet the four hour fraud requirement required by the California Board of Accountancy.