Tactics For Preventing and Detecting Fraud

November 2007
Accounting & Technology Consultants
TACTICS FOR PREVENTING AND DETECTING FRAUD
Although auditors are increasingly expected to assure the

company and the public that no fraud was committed, the
company is still primarily responsible for detecting and preventing
fraud. For fraud to occur, three conditions must be present:
The opportunity for deception must be present (e.g. in
effective controls, the ability of management to override
controls).
There is a growing focus by companies and accounting

professionals on the prevention and detection of fraud?. What
exactly is fraud? A basic definition is a deliberate act made to
There must be incentive or pressure to commit the fraud

(e.g . unrealistic performance goals, lucrative financial
incentives).
secure unfair or unlawful gain. This article focuses primarily on

fraud perpetrated through the misstatement of financial statements,
more so than the misappropriation of property or money.
The perpetrator must have the attitude to commit the fraud

or be able to rationalize the act.
The 2005 PriceWaterhouseCoopers Global Economic Crime

Survey stated that 45% of companies who responded to the survey
The company has responsibility for the first condition, can have
experienced fraud in the last two years. On average, these
strong influence over the second condition and has some ability to
companies had experienced eight serious incidents resulting in
control the third condition through hiring and performance review
damage to one or more of the following: reputation, employee
practices.
morale or business relations. The average financial impact was

$1.7 million for each incident. A disturbing fact to come out of the
survey was that over 30% of fraud incidents were discovered by
accident. This makes chance the most common source of fraud
detection.
The responsibility for fraud detection and prevention must be shared

by all levels of the organization, working closely with outside
experts, including the external auditors. Appropriate anti-fraud
tactics differ depending on the roles and responsibilities of the
organization and function employing them. The following is a
Given the significant impact that fraud can have on a company, or
summary of anti-fraud tactics generally recommended for each of
even an entire industry, it is not surprising that increased attention is
the functions with significant anti-fraud responsibilities:
being given to the topic. Detecting and preventing fraud is taking

on a much more significant role in the accounting industry. There
Board of Directors/Audit Committee
has been a shift in the general publics perception of the purpose of
The best anti-fraud tactic a company can have at its disposal is a
a financial statement audit and the responsibility of the auditor.
culture of honesty and integrity. If the company is comprised of
It is not uncommon for people to believe that a primary function
ethical individuals, it greatly reduces the chance of fraud. Building
of an audit is to detect fraud. An unqualified opinion is sometimes
such a culture starts at the top with the board of directors and the
interpreted as an indication that there was no fraud. Companies
audit committee. They need to create and communicate a clear
and the auditing industry are responding to this perception and
message that fraud will not be tolerated anywhere in the company.
taking action to meet the expectation.
Relevante, Inc. All rights reserved.
www.relevante.com
November 2007

The board should also identify who will lead the risk management
Anti-Fraud Specialists
efforts and set the expectations for risk management performance.

The level of risk a company is willing to accept must be articulated.
Many companies are now engaging anti-fraud specialists in
This will provide the risk manager and operating management with
addition to, or as part of, their external audit efforts. These
an understanding of circumstances which require involvement of
specialists specifically look for fraud and for opportunities for fraud
the board of directors.
to be committed. They interview employees in a wide variety of

positions and have open discussions with the audit committee about
all concerns regarding the risk or actual occurrence of fraud
Company Management
anywhere in the company.

Management is responsible for day-to-day anti-fraud efforts. A
company is less likely to experience fraud if it is efficiently run and
its resources properly controlled and applied.
Using a strategic plan to set expectations and address business risks
allows for solid budgeting and forecasting. Variance analysis is then
more meaningful and can assist in identifying irregularities in the
financial statements.
Creating metrics to measure key activities and keeping accurate
operating statistics can identify areas of exposure. These metrics aid
External Auditors
interpretation of operational results, increasing the likelihood that

unusual activity will be identified and tracked to the source. Metrics
The primary objectives of the external auditors are to determine
also provide a means of feedback and communication between
whether the company produces accurate and complete financial
the operations and the finance departments. Managers must
statements and maintains an effective system of internal controls.
understand their responsibility for fraud detection and deterrence.
Their role has become more challenging as they must now
This understanding will guide them in building effective controls
customize the audit to address the risk of fraud in response to the
and processes in their areas of responsibility. A well run company
changed fraud detection expectations.
limits the opportunity for fraud. When fraud is discovered,

consistency and visibility in the response to it is crucial. The
External auditors need to review all key control functions and the
perpetrators need to bear the consequences of their actions and
volume and type of transactions to effectively assess the risk of fraud.
these consequences need to be visible to the organization. Also,
Auditing software is frequently used for the analysis of large volumes
any discovered conflicts of interest need to be addressed and
of transactions to reveal discrepancies and process problems.
resolved openly. This builds credibility and integrity within the
Special attention is given to higher risk transactions such as
companys workforce and provides examples of desired conduct.
post-closing entries, non-standard entries, entries with no back-up,

and entries requiring the use of estimates. Fraudulent financial
Internal Audit
misstatements are often the result of recording these types of

transactions.
The internal auditors focus is more on controls and processes than

on day-to-day activity. Internal auditors help ensure that the
Tactics employed by auditors also include varying the timing,
companys controls and guidelines are enforced and that the
nature and scope of the audit to avoid being predictable as well as
companys processes produce financial statements of the highest
to target areas of high risk. Varying audit activities can be useful in
integrity. Internal Auditors also identify risks and opportunity for
revealing activities that company personnel are actively working to
fraud in the organization on an ongoing basis.
conceal.
www.relevante.com
November 2007

In summary, building a culture of good communications and
integrity and maintaining strong internal controls are the best
tactics for preventing fraud. Anti-fraud tactics need to be placed at
all levels of an organization. Since fraud can happen at many levels
and is customized to the organization, its prevention and detection
needs to be just as customized and pervasive.
Sources
ACFE Fraud Prevention Check-up 2004,
Fraud Prevention, AICPA
PCAOB Release No 2007-001, January 2007
PriceWaterhouseCoopers Global Economic Crime Survey 2005
AICPA Training on SAS #99 and Fraud, Chapter 3
Back to Newsletter
About the Author

Stephen McCourt is a Senior Consultant with Relevante. For more information, contact him at smccourt@relevante.com
About Us
Relevante is a leading Mid-Atlantic practice providing
For more information, or for your consulting or staffing

needs, please contact any of the following Relevante
professionals:
Accounting & Technology Solutions to Fortune 1000 and other

industry leaders. The company services clients from four
locations throughout the metro markets of Philadelphia,
New York, and Hyderabad, India. For more information about
Relevante, please visit our website at: www.relevante.com.
Brandon Weinstock, CPA
Fred M. Kaplan, MBA, CBM
Ph: 610-203-2536
Ph: 215-407-7558
William Brassington, CPA
Joe Curran, CPA
Ph: 215-828-6431
Ph: 302-563-7622
Information provided in this publication has been obtained by Relevante, Inc. from sources believed to be reliable. However, Relevante Inc. guarantees
neither the accuracy nor completeness of any information and is not responsible for any errors or omissions or for results obtained by others as a
result of reliance upon such information. This publication does not, and is not intended to, provide legal, tax or accounting advice.
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November 2007

Accounting & Technology Consultants

TACTICS FOR PREVENTING AND DETECTING FRAUD

Although auditors are increasingly expected to assure the

There is a growing focus by companies and accounting

There must be incentive or pressure to commit the fraud

secure unfair or unlawful gain. This article focuses primarily on

The perpetrator must have the attitude to commit the fraud

The 2005 PriceWaterhouseCoopers Global Economic Crime

experienced fraud in the last two years. On average, these

companies had experienced eight serious incidents resulting in

control the third condition through hiring and performance review

damage to one or more of the following: reputation, employee

morale or business relations. The average financial impact was

The responsibility for fraud detection and prevention must be shared

Given the significant impact that fraud can have on a company, or

summary of anti-fraud tactics generally recommended for each of

even an entire industry, it is not surprising that increased attention is

the functions with significant anti-fraud responsibilities:

being given to the topic. Detecting and preventing fraud is taking

Board of Directors/Audit Committee

has been a shift in the general publics perception of the purpose of

The best anti-fraud tactic a company can have at its disposal is a

a financial statement audit and the responsibility of the auditor.

culture of honesty and integrity. If the company is comprised of

It is not uncommon for people to believe that a primary function

ethical individuals, it greatly reduces the chance of fraud. Building

of an audit is to detect fraud. An unqualified opinion is sometimes

interpreted as an indication that there was no fraud. Companies

audit committee. They need to create and communicate a clear

and the auditing industry are responding to this perception and

message that fraud will not be tolerated anywhere in the company.

taking action to meet the expectation.

Relevante, Inc. All rights reserved.

Accounting & Technology Consultants

TACTICS FOR PREVENTING AND DETECTING FRAUD

efforts and set the expectations for risk management performance.

Many companies are now engaging anti-fraud specialists in

addition to, or as part of, their external audit efforts. These

an understanding of circumstances which require involvement of

the board of directors.

to be committed. They interview employees in a wide variety of

anywhere in the company.

interpretation of operational results, increasing the likelihood that

The primary objectives of the external auditors are to determine

also provide a means of feedback and communication between

whether the company produces accurate and complete financial

the operations and the finance departments. Managers must

statements and maintains an effective system of internal controls.

understand their responsibility for fraud detection and deterrence.

Their role has become more challenging as they must now

This understanding will guide them in building effective controls

customize the audit to address the risk of fraud in response to the

and processes in their areas of responsibility. A well run company

changed fraud detection expectations.

limits the opportunity for fraud. When fraud is discovered,

perpetrators need to bear the consequences of their actions and

volume and type of transactions to effectively assess the risk of fraud.