Avoiding Accounting Fraud

Illumeo Customer Success's Profile

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When you think of accounting fraud, Enron likely comes to mind. The Enron and Arthur Anderson scandal rocked the accounting world, and ushered in the age of Sarbannes-Oxley and the PCAOB. But it's important to note that all these changes and updates to regulation haven't actually done much to prevent accounting fraud. 

In fact, there are new frauds being discovered on an almost daily basis. It was recently revealed that the SEC is investigating GE and as This New York Times article says, accounting investigations tend to take on a life of their own once they've begun. Just ask the six accountants - including 3 KPMG partners -  recently charged with fraud. This accounting fraud even involves employees of the PCAOB, one of the very organizations created to combat this very issue. 

That's why it is so important for management to be proactive with fraud controls and always be on the lookout for potential fraud. It can come from anywhere, and often when you least expect it. Of course, that doesn't mean you can't be prepared. 

Familiarizing yourself with the fraud triangle is a good place to start. 

There are three stages of the fraud triangle, including:

Pressure

If an individual is facing what they feel is an unshareable problem, they are likely facing pressure that could drive them to commit fraud. The pressure could be financial or emotional, but whatever it is, the person feels that they cannot share it with anyone. 

Opportunity

In the course of everyday business, individuals often have opportunities to commit fraud. They have access to sensitive information, financial records, or even actual cash. If they are already facing pressure, and they think they could commit fraud without getting caught, the opportunity may seem to good to pass up. 

Rationalization

Finally, the individual will be able to rationalize the fraud. They will tell themselves that they aren't really criminals, that this is a unique circumstance and it's ok for them for some reason. Even after they are caught, they often still feel that they were in the right.

While management cannot control all three stages, they should be aware of each and keep an eye out for potential red flags. What they can control to an extent, however, is the second stage - opportunity. If management can limit the opportunity for fraud, they can mitigate the risk of fraud in their organization. 

The more you learn about fraud - how it happens, why it happens, and how it can be avoided - the more likely it is you'll be able to lower your organization's risk. A great way to learn more is to take online courses (like we offer here at Illumeo - you can even earn your Business Fraud Certification) or you might consider signing up for our upcoming hands-on webinar, To Catch a Thief. This webinar will be presented Lynn A. Fountain, CPA, and will provide you with the opportunity to evaluate ‘real-life’ fraud scenarios and attempt to determine the red flags presented and identify “what went wrong”.