Fraud & Forensics
Where Have All the Internal Auditors Gone?
The Daily Record, May 11, 2009 by Gina Bliss
Now is a great time in American history to be a fraud professional. Fraud is rampant. Actually, it’s been rampant for a long time, but a lot of cases are just coming to light because the economic downturn makes some kinds of fraud difficult to sustain. Hedge fund fraud and Ponzi schemes are examples. We know that mortgage fraud was a great contributor to our current economic problems. And new frauds are springing up as a result of the financial struggles of some. Last month’s discussion of work-at-home fraud is just one case in point (See “Fraud Facts,” April 13 edition of The Daily Record).
Recently, I heard talk around my office’s water cooler concerning the latest fraud in the news. One of our partners said to another in an outraged tone, “Where were the internal auditors?” The other said, “They were probably laid off.”
Unfortunately, internal auditors’ salaries are overhead. In difficult economic times, the budget for the internal audit department sometimes is reduced. But that’s just the time when you need them the most. Any time there is fraud at the corporate level, there’s the potential of internal auditors’ finding the fraud. Most large companies have internal audit departments, which include company employees who report to an audit committee instead of management.
Medium and small companies and large non-public companies often have no internal audit department. Should they? Internal auditors do much to create the perception of detection. Internal auditors assess controls and make recommendations to improve them to reduce fraud risk. Internal controls address authorization and review, segregation of duties, access to assets and records and the document trail. Auditors interview staff to make sure the controls are understood, and perform walkthroughs to test actual function of controls. In other words, money spent on internal auditors is money spent to prevent fraud.
In addition to a focus on internal controls and assessing fraud risk, internal auditors also perform audits. They have routine auditing duties that work to prevent and detect fraud. For instance, an auditor might audit 10 employees every payroll cycle, probably going all the way back to the personnel file to check for proper documentation, working up to the actual paycheck calculation. Time cards would be reviewed, and the auditor would verify that anyone paid actually is an employee, not a ghost employee.
When there are enough internal auditors, surprise audits can be performed. An unannounced audit of inventory cycle counts is just one example. A surprise audit performed anywhere in the company is a great deterrent.
An employee who struggles to pay the mortgage and credit card payments also may be contemplating how to supplement his or her salary by stealing from an employer. Such employees may feel justified because they believe they are being underpaid. The idea that a surprise audit could occur should be enough to prevent the theft.
Businesses today have more need for internal audit work than ever before. A company’s risk of fraud is increased when it has multiple locations. Geographic risk occurs when management loses control of processes in remote locations, but more and more companies are expanding into other regions in order to grow.
Online business is the norm today, but it also creates its own set of internal control difficulties. Even a risk-averse manager isn’t likely to have the skill set needed to think like an embezzler, and put the proper controls in place to deter fraud.
Businesses can outsource risk assessment and internal auditing work to an outside firm. Work can be paid by the project or by the hour. A written report of the findings is prepared for management and/or an audit committee, and recommendations are included.
The perception of detection is created, and management learns how to continue it.
No one wants to be in the news for fraud, or be discussed at the water cooler because of fraud.
Gina Bliss, CPA, CFE
Gina is a senior manager at EFP Rotenberg who specializes in internal audit, fraud audit, and forensic accounting. Article reprinted courtesy of The Daily Record.