Fraud and the accountant: Why be afraid of an opportunity? (Part 2 of 2)

By Gunther R. Borris, CPA
Member, MACPA Business Valuation & Litigation Services Committee

In a previous article, I described fraud as the criminal deception intended to financially benefit the deceiver.

I expressed that auditors have yet to develop an attitude of expectations of fraud. We must accept responsibility for material undetected fraud if we do not communicate to our clients that it is their responsibility to prevent and detect material fraud.

CPAs, when properly trained, can assist clients to install procedures and teach clients proper supervision and compliance methodology.

There are possibly three major categories to describe the opportunities for fraud to occur:

Misappropriation of assets by employees
Financial reporting or management fraud
External fraud committed by non-employees

I'd like to discuss the reasons for the motivation of assets being misappropriated by employees. But first, we need to understand the difference between thefts (such as absconding with money) and fraud, which is covering up the theft of money.

It is very easy to imagine that a person goes to the cashier's window at the bank, demands and receives a lot of money, escapes through a side door, and isn't seen since. He is a thief. His wife, the controller at the bank, is cooking the books in such a fashion that even the bank examiners can't find it. She has committed fraud.

Theft in this country involves approximately only $10 billion, while fraud, as mentioned before, involves defalcations amounting to $400 billion in any one year.

There are two pillars on which fraud is built:

The victim thinks people surrounding him are honest, usually his friends, clients, acquaintances, co-workers.
The person committing the fraud, in many cases, rationalizes that he is really not perpetrating fraud, that the victim can afford it, will not miss it, or deserves it.

In most cases, these pillars are the reasons fraud can exist to such a large extent. We do not suspect our employees are the ones who would commit fraud. On the other hand, the perpetrator will rationalize that he is not really committing a crime, or at least finds a sufficient excuse for it.

In our society today — possibly more, though, in the United States than in most other countries — many people believe they and their families are judged depending on the standard of living they present. Thereby, many are forced to spend money in excess of their means. Worse, many feel they are entitled to live a higher standard than they do. This fact creates pressure of entitlement and of increasing one's available funds to the extent one's ethics permit it.

There are so many different items of pressure that may motivate an employee to commit fraud. There are financial pressures due to overuse of credit cards, high mortgage payments, unpaid medical bills, investment losses, a divorce, gambling, alcohol and so many others, not to mention work-related problems.

Becoming more aware of fraud

For this discussion, I want to consider the stress of discovering fraud encountered by the accountant in carrying out his profession. How can we become more aware of fraud? Is it necessary to change from the "friendly" accountant to the "suspicious" accountant? Do we have to live a professional life in which we must always consider that someone we least expect may commit fraud?

Actually, it is not quite as bad as it sounds. We can choose our friends as we always did. We can also be friendly, concerned and helpful with our clients and their staff, but we must always consider our responsibility to our clients and the public.

It is our duty and responsibility to point out to our clients that fraud can be expected everywhere — even in their own business, even among their own employees. It is impossible to discover every fraudulent act, but there are steps that can be taken or initiated which reduce the possibility of fraud.

The accountant must be sure to point out to his client that it is his responsibility as a prudent businessperson to create an environment of ethical behavior and install sufficient controls to remove any likelihood of fraud being committed by an employee.

As has been said so many times before, accountants are not responsible for discovering fraud committed by one of the client's employees; it is the client's responsibility. But we are responsible, as the accountants, to check the internal controls necessary to prevent material fraud. We must consider sufficiency of internal controls for all of the client's types of operations.

As mentioned before, we can assist clients to install methods and procedures to prevent or discover fraudulent acts by their employees.

Next time, I will discuss fraud committed by management.

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