Fraud and the accountant: Why be afraid of the opportunity? (Part 3)

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

The prevention and discovery of fraud is the responsibility of management — all of us agree. The majority of accountants are afraid to assist management in that task because it might be construed as taking on the responsibility of preventing fraud.

Tax season and extensions to file tax returns have been successfully completed. We start to look around to find new services for clients, which will be of value to the client and at the same time keep our staff gainfully occupied.

Why not help management review and design controls which will reduce or prevent the incidences of fraud? Your letter of engagement and subsequent proper documentation will prove you are not assuming any responsibility.

While performing any services, you must mention the person's name you assist and his or her position as part of management. Any correspondence must clearly show that your services are to assist management for furthering better controls over activities, employees and outsiders.

There is no reason why we should not educate ourselves, go to seminars offered by the MACPA, AICPA or CFE (Certified Fraud Examiners), or read available technical materials and obtain sufficient knowledge to assist management of our clients (or other business managements) in reviewing effectively controls and systems on hand.

First, management should verify the existence of a written mission statement. It will express the company's mission and the organization's expectation of employees to adhere to the highest level of legal, ethical and moral standards. At the same time, management pledges to observe the same conduct.

The second step for management is to establish or review the organizational code of conduct or ethics. At a minimum, it should provide in detail the following points:

Employee conduct. The organization expects all employees to act in a businesslike manner. There is definite prohibition of drinking, fighting and similar acts while on the job. Employees are prohibited from engaging in any sexual harassment and writing or accessing inappropriate material on their computers.
Conflicts of interest. Employees must not act or be persuaded to act in any manner which may conflict with the interest of the employer. Any employee gaining knowledge of any action by another employee contemplating or performing such action must report it immediately to management.
Outside activities. Any employee who seeks or accepts employment in addition to its present employment must ask management for permission. Civic, educational, charitable or religious activities are encouraged and at times supported by the organization.
Relationships with customers and suppliers. Employees must report (and will possibly be prohibited from making) any investment, directly or indirectly, with customers or suppliers.
Gifts, entertainment and favors. Employees are prohibited from accepting gifts (small or large), entertainment or favors from customers or suppliers. This could be construed as ultimately giving preferential or fraudulent treatment to such customer or supplier.
Kickbacks. Receiving or taking kickbacks of any kind is considered fraudulent behavior which will lead to prosecution and dismissal.

The organization may require additional security on jobs which require great sensitivity, dealing with large amounts of cash, investment securities or other positions requiring honesty and personal skills. Such security may include:

polygraphs,
fingerprinting,
drug tests,
intelligence tests, or
psychological tests.

There are many other matters which the organization should include in the code of conduct or code of ethics.

Of great importance is to review and assist management with proper procedures in the computer section of the organization. Larger companies have a special room for their mainframe computer and file servers. Particularly, access and egress need security, which every person must observe. Similarly, PCs and workstations should be reviewed and must have necessary security and conduct requirements.

Auditors who have received special training in the discovery and prevention of fraud should assist management in reviewing the general ledger and all books of original entry. With your assistance, management can then develop internal audit and review procedures to prevent or detect fraud.

Likewise, tax specialists, who also are trained and familiar with the discovery and prevention of fraud, can assist management in developing special security measures regarding payroll taxes; foreign, federal and state income taxes; sales and use taxes; and all other taxes.

It is important that management review the physical layout and security of the offices, manufacturing, shipping and inventory departments of the organization. This includes security measures of employee entrance and departure.

Offering fraud prevention services to our clients is not dangerous. The lack of it is very dangerous.

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