Fraud, Ethics and Control: An Accountant’s Responsibility
- Posted by admin
- 30 October 2015
- Accounting, Articles
Accountants rely on consistency at all times to remain diligent in their work. Consistency works well and ensures an accountant follows all of the best practices of control. But, what happens when ethics is a one-sided endeavor where a fraudster depends on you to overlook vital numbers? Numbers that you would never miss.
How can this happen? Consistency.
Consistency: Friend or Enemy?
Fraud occurs because of predictability. The last action a fraudster wants to take is one that will end in him or her getting caught. There is always an internal risk assessment that determines the likelihood of being caught – for most fraudsters.
Consistency in accounting leads to predictability.
As an accountant, how many procedures do you conduct exactly the same way? If you were going to commit fraud, you wouldn’t do it with the intention of being caught. The same mindset is seen with a fraudster. Circumventing a control system requires you to follow a consistent pattern in the work you do.
Imagine an accountant that only analyzes sales from vendors they do not trust.
Altering numbers that were overlooked would be an option for fraud. If an accountant knows that the numbers for XYZ, a company that purchases X widgets per month, are always the same, they may even overlook these numbers completely.
Patterns in your very behavior can lead to consistent behaviors that become exploited.
Breaking through these patterns allows an accountant to be less predictable, and lowers the risk of fraud occurring. Ensuring that there is a variation in your control system is the best way to stop fraud. Checking specific monthly accounts routinely would be an option, or ensuring thoroughness with every procedure would be the best option.
Control or procedure that isn’t a deterrent for fraud has no value.
Trust in Only Yourself
A major issue occurs when working for the same client for years. Trusting in the client that has impeccable accounting standards in place may result in oversights in the form of fraud. Trust affects companies internally.
Ethics often diminish when a person has a valid reason to conduct fraud.
Amy Wilson is a prime example of a person that lost her ethics when she needed money. Amy told herself that she would “pay back” the money that she had stolen, but this never transpired. The $5,000 she initially took and would “pay back” swelled to $350,000 before she was finally caught.
Amy’s boss trusted her to be an honorable, trustworthy bookkeeper.
When Amy needed money, she decided she would take it out of her company’s account and eventually pay it back. The issue was that her boss trusted her completely and never overlooked her work or hired someone else to be a second pair of eyes.
Ultimately, Amy’s bank would call her boss and inquire about company checks that were being used to pay Amy’s credit cards.
This blatant trust cost her employer $350,000 in total and landed Amy in jail. The moral of the story: don’t put too much trust in another person’s hands.
A simple measure that would have been able to circumvent the fraud that was occurring would’ve been hiring an outside company, with no ties to Amy, to conduct an audit on the company’s books. If this measure had been in place, the auditors would’ve discovered the fraud well before it did damage to the employer.
Effective internal controls could have thwarted the fraud.
Accountants will struggle to make company owners understand the investment of internal controls. From a purely business decision, it’s easy to understand why a company would rather not perform a costly audit because they already have a diligent bookkeeper.
Ethically, it’s your job as an accountant to justify your recommendation to the business.
Misaligned Incentives Can Harm Business
Ethics stretches beyond fraud. Companies and their employees may have the best interest of the client in mind, yet the placing of an incentive leads to harming a business.
How can an incentive harm business?
A prime example is Domino’s Pizza. The pizza company’s slogan: “Delivery in 30 minutes of less or your pizza’s FREE”, caused major issues for the company. Drivers that were able to quickly deliver pizza would receive a slight bonus, while missing the 30 minute delivery time caused the employee to have their pay docked.
Why is this a bad incentive?
From an outside perspective, fast delivery is great for the customer. Dominos grew dramatically off of this promise, but their employees were getting into accidents to meet the promise, and many received tickets.
All of this came to an abrupt end when a driver ran through a stop sign and killed another driver.
Ethically, the accountant for Domino’s knew that employees were breaking the law under the new compensation system, but nothing was done to put an end to it.
Human behavior dictates that a person will change their behavior to provide a greater benefit for themselves. In this case, drivers started breaking the law and were driving recklessly because they wanted a bonus for delivering on time. Improper incentives will cause employees to do anything in their power to benefit themselves – even at the cost of the company or their customers.
Human Behavior Requires Controls and Procedures to Change
Human behavior requires continual monitoring and adaptation of controls and procedures. Today’s systems will change as laws and human behavior dictate. A prime example of a new law that can lead to fraud is the Affordable Care Act.
Under the new law, the DEA (Drug Enforcement Agency) allows pharmacies to take back unused medication.
What does this mean for accountants?
New procedures to detect pharmacy fraud must be implemented. Pharmacies that have medications returned are required to destroy them by law. Selling these medications can lead to increased profits, and it’s easy for a person to sell these prescriptions without any internal oversight.
Sales would exceed purchases which would alert an accountant, but if a customer paid in cash, there would be no means in which the seller would be caught by the accountant. Internal procedures and controls would have to be such that the medication destruction was overseen by multiple personnel, or a more complex procedure would need to be initiated.