Don’t Worry, There’s Still Plenty of Accounting Fraud Out There

Posted on by Caleb Newquist

In what might be a lagging indicator of recession-spawned misdeeds, the percentage of reported corporate frauds compared with all other reported incidents increased to 20.3% in the first quarter of 2011, a rise of more than 60 basis points from the previous quarter, according to data from 1,000 organizations worldwide. Of the 30,000 ethics- and compliance-related reports from people at those organizations in the first quarter, more than 6,100 concerned accounting or auditing irregularities, embezzlement, kickbacks, and other forms of fraud. [CFO]

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(UPDATE) Fooling Auditors Is So Easy, a Caveman Could Do It

Thumbnail image for sachdeva_sue.jpgIn the spirit of O.J. Simpson, Tracy Coenen explains today, that if Sue Sachdeva stole $31 million and spent most of it on some high-end threads and then sold the crap she didn’t want, it would’ve been a snap.
We’re not talking Enron type stuff here, just making off with cash:

All it takes are three steps to make this fraud nearly undetectable in a company in which the other members of the executive team aren’t paying attention. (And don’t worry, dear readers, that I may be giving away any secrets to committing fraud and covering it up. Any serious fraudster already knows these three things.)
1. Keep the fraud off the balance sheet.
2. Keep all transactions below the scope of testing by the auditors.
3. Don’t commit fraud during the last month of the fiscal year and the first month of the following fiscal year.
Can it really be this simple?


Here’s the quick and dirty:
Point 1 – Tracy notes that 80% of audit procedures focus on the balance sheet so if Suze was slamming all the bogus transactions amongst 4 or 5 income statement expense lines, no one would get wise to it.
Point 2 – If she did it, Suze probably knew what GT’s scope was (it’s supposed to be super-secret). She could plan the amount of her transactions to fall under this scope every time.
Point 3 – Auditors probably spent most of their time looking at bank statements for the last month of the fiscal year and the first month of the subsequent fiscal year. The rest of them don’t get much attention.
So there you have it. Throw in the incestuous management team, auditors that may be trying to get on each other and you’ve got a slam dunk.
UPDATE 7:38 pm: We got to wondering if Tracy’s statement “Any serious fraudster already knows these three things” were true, so we asked one. Crazy Eddie CFO, Sam Antar indulged us:

[Tracy] is correct. The fraudster always has the initiative because they are judgment oriented in their approach to crime, while auditors are process oriented in their approach to audits. In other words, fraudsters know how to think out of the box to solve problems and achieve their goals, while auditors rely too much on process and procedure to accomplish their missions. In the criminal’s world, judgment is more powerful than process.

We’ll leave it there (that’s right CNN).
Koss Corp.: Commit the fraud and cover it up [Fraud Files Blog]