Fraud Examination and Management - Assignment Example

RENNING HEADER: Fraud Detection and Management Client inserts his/her name Tutor’s name Name of institution Course title Date of submission According to Ernst & Young, 1996, Fraud is an intentional act or omission designed to deceive others, hence the victim suffers a loss and or the person perpetrating the act gains Question 1 1. What clues caused Jane to suspect that fraud was involved There were some accounts payable checks that lacked complete endorsement by the payees. Further, fraud was suspected since the checks were payable to dual payees and it was important that the endorsement of each payee be obtained. Besides, the handwriting on the checks was similar in all checks although the names written were different. Further doubts mounted when she realized that the checks were cashed at the same convenient place which was less than five miles away while the mailing address in one of the checks was over two hundred miles away. She further noticed that there were no supporting documents for the payments. Worse still, there were other payments made to the same payees but the names were different from those on the endorsement document. This entire aspects made Jane suspect that fraud was involved in that firm. 2. Why is it important for fraud examiners to follow up on even the smallest inconsistencies Fraud is a universal evil that affects everyone and it is of critical concern to those who manage organizations to follow up any small inconsistence especially in the finance department. This is for the sole reason that the losses involved are greatest and thus the need to control and prevent fraud is necessary as soon as any suspicions are made. Before making any legal move, the fraud examiners follow up the inconsistencies keenly in order to establish a strong basis of evidence in regards to the nature of fraud in question. The little indicators lead to greater realizations of fraud masterminds within an organization that may have operated for a long period without and suspicion. For instance, Jane followed up the endorsement question and finally came with adequate evidence of fraud in the company that led to obtaining an affidavit of forgery. Therefore, a small indicator should not be ignored because it is a guideline to more evidence when close examined. 3. In an attempt to identify possible suspects, the auditors researched the personal files of every employee in the department. What things might they have been looking for to help them identify possible suspects Since inconsistence in names was suspected, they wanted to check whether the signatures corresponded to any of those in the checks and the endorsements. They were also checking if the names of the payees were similar to those of any employee in the company. The location for payment indicated was also considered in checking the employee’s personal file where they realized that someone who stays three miles away was one of the payees. This gave them very clear evidence on the people involved in the case of fraud in that particular company. Generally, the personal file was important in comparing the details in the checks obtained and the personal details of the company’s employees. This could help if any detail corresponded to the checks’ information. They were able to authenticate the checks and found out the suspects of fraud in the company and thus obtained an affidavit of forgery against them. Question 2 1. What are some of the fraud opportunities within Green Grass? There are numerous opportunities for fraud within the Green Grass company. Firstly, the company was controlled by the father of the family offers good avenues for fraud to thrive. Although the business is experiencing some level of success, the family may tend to over depend on the business thus lead to fraud. Later, the entire management of the business was in the hands of a single employee who was in charge of the main operations of the company such as payments, receipts and balancing financial books of accounts (Ernst & Young, 1996). The individual actually took advantage and diverted the authority of the company to him such that he was the chief manager. He was involved in fraud activities as indicated by some of the symptoms. Either, the company’s employees were delegated duties hence job specificity. The workers thus could easily observe job routine such that fraud could be done without the notice by the owner especially the drivers allocated the responsibility to collect money from the customers. Lack of job rotation is a possible opportunity for occurrence of fraud (Deakin University, 1994). 2. What symptoms of fraud exist and what symptoms should the owner look before if he believes fraud may be occurring? After a considerable period of time, the owner observes that expenses increased greatly and abnormally which indicates that fraud activities especially in the financial control office may be going on. He further observed that interaction with friends had reduced indicating that trust and confidence in him had shifted. Most of the employees wanted to stay away in order to shun any chances of suspicion that may arise due to close contact. Another symptom that was observed is that workers seemed reluctant in completing their respective duties on time, something that was effective in the past. This indicated that the person in control was not interested in the well being of the company but rather his own interests. According to the Deakin University (1994), despite the numerous symptoms of fraud observed, the owner should carry out a thorough monitoring exercise to find out whether the manager colluded with the employees in any way to perpetrate the fraud offence. The owner should venture into finding out whether any transactions were made without proper procedures, requisitions, documents and receipts. Names and signatures of receivers should be counterchecked to authenticate the validity of the transactions (Duncan, 1996). Above all, he should determine whether there are any counterfeit documents within the company premise. 3. What steps should be taken to make sure fraud does not occur and what are the costs associated with these steps? According to Ernst & Young (1996), it is prudent for any business or organization to carry out auditing regularly so as to monitor any activities that may lead to fraud. From the above incident, the main operations of a company should not be left in the hands of an individual. To reduce chances of fraud, a team of workers who should be monitored constantly should be bestowed with such responsibilities especially in the financial department which is susceptible to fraud (Ribstein, 2002). Though costly, the long term employees who have already become well informed about the company should be observed. The practice of job rotation should be in full command such that workers do not get used extensively to a single department. Also, the interaction levels between the senior managers and the workers should be looked into to reduce their influence such that they turn against the owners or collude in fraud activities. Moreover, a technological system should be applied such that all the significant operations are monitored from a central position which should be mandated by the owner or someone trustworthy. Stored data security devices should be put in place although they are costly. Being a long term solution to fraud prevention and control, companies should invest in such systems in steps. (Ernst & Young, 1996). Question 3 Based on the case study data comment on the following issues as they relate to possible fraud: 1. Derek’s firm ‘selling’ Derek to the client as an ‘SAP expert’ though he hadn’t even seen the software before. This is an aspect of fraud because the company employs an unskilled worker with the aim of reducing costs. They dismiss people who are qualified for the accomplishment of the project and employ Derek who does not have any training. The fraud of dishonesty in regards to employee qualifications thus lacks integrity in the company’s employee management systems as described by Clemency (2002). Worse still, the company was seeking solace in a fair deal in regards to cost efficiency, but on the other hand remaining inconsiderate in the quality of services offered to the customers. 2. The unpredictable well -dressed purchasing manager The purchasing manager creates a high level of fraud suspicions because his lifestyle is extremely extravagant. His interest is not the company’s welfare, but he is much interested in his outlook as well as obtaining prestigious items such as cars. It is doubtful how a purchasing manger can obtain such luxuries. Either, he has been in the company long enough to understand the operations and so he can easily get away with fraud activities. (Pidco, 1996). In addition, he has a close relationship with his vendors, something which indicates that he colludes with them in one way or the other in stealing from the company. His mood swings indicate that when he doubts some leakage of information about his deals, he mends fences strategically. All these are clear indications of an individual who is fraudster. 3. The sales practices revealed in the Internal Sales Department The lady in charge of the internal sales department is not college educated. She is employed in a position that requires great skills although she is lacks the qualifications. This reveals that ethical considerations are ignored when employees are obtained. Because of incompetence, the department supplies to customers without proper order placement. This indicates application of poor business practices caused by lack of proper qualifications. It is an indicator of possible fraud in the firm. Question 4 1. Discuss symptoms of fraud that may be evident to a fellow employee Fraud is observable in an in individual in many ways this includes, high level of dishonesty which is applied for personal advantage in this case, the company has extended a favor to its workers, an opportunity which is greatly misused by some employees for their own advantage. Another characteristic which shows an individual is involved in fraudulent activity is carrying out odd transactions that is carrying out office business during odd hours, frequency (carrying out too many transactions or few transaction), carrying out transactions with supplies in questionable places, the amount involved is too high or too low, and when the parties or persons involved in the transactions are related or odd personalities. Another factor evident in a fraudulent employee is the ability to cover up transactions this occurs when an individual is familiar with company operations hence having a knowhow on the available loop holes in the organization. 2. Recently, his employee has been putting more emphasis on controlling cost. With the slowing of overall technology spending, executives have ordered managers to closely monitor expenses and have given vice-presidents greater responsibilities for balance sheets. What positive or negative consequences might this pose to the company in future fraud prevention? In reference to Dyson & McKenzie (1996), this move is significant in an attempt to root out fraud from the company in a systematic way. With these moves, employee fraud will be greatly reduced resulting into complete honesty within the company. In monitoring expenses and following up the balance sheets will eliminate false expense reports thus save the organization from embezzlement of funds by the employees. On the other hand, the applied strategies may make the workers feel uneasy within the work environment and thus less job satisfaction. Therefore, the managers should aim at eliminating fraudsters rather than involving all the workers in the scam where some may be very innocent. Instead, they should employ an advanced and comprehensive set of fraud frameworks which will offer detection of fraud, decision making and other fraud operational capabilities. 3. As discussed previously, all frauds involve the following elements; perceived pressure, perceived opportunity and rationalization. Describe two of the key elements of the Jones fraud-pressure and opportunity. In the case presented, when Jones realizes that there is an opportunity for engaging in fraud, he effusively takes part in it. His activities are accelerated by the pressure he experiences with the knowledge that in case he is caught, he shall have made enough. That is why he makes numerous orders while involving other people and eventually fills his bank accounts with a lot of illegitimate funds. It is thus through perceived pressure that the opportunity is extensively exploited before it gets out of hand (Dyson & McKenzie, 1996). 4. From the scenario, what measures has the company taken to prevent fraud. In what ways could the company improve? In addition to the change strategy employed by the company in an attempt to eradicate fraud, it is prudent to come up with proven rules and analytical methods which may be important in investigations, identifying self-deals, embezzlement, collusion and identity shielding (Ribstein, 2002). This could ensure long term fraud management by establishing core fraud management functions. In addition, the favors extended to employees should not be so open, but rather well managed to avoid any opportunities for fraud (Clemency, 2002). References Clemency, J. (2002). "Corporate Fraud: Where Should the Buck Really Stop?" American Bankruptcy Institute Journal 21 (November). Deakin University (1994). Fraud against Organizations in Victoria, Deakin University, Geelong. Duncan, M. (1996). “Counterfeiting in a technological society”, International Criminal Police Review, no. 456, pp. 18-21. Dyson, C. & McKenzie, D. (1996). Guidelines to Fraud Prevention, New South Wales Police Service, Fraud Enforcement Agency, Sydney. Ernst & Young (1996). Fraud: The Unmanaged Risk, Ernst & Young, London. Pidco, G. (1996). “Check print: A discussion of a crime prevention initiative that failed”, Security Journal, vol. 7, pp. 37-40. Ribstein, L. (2002). "Market vs. Regulatory Responses to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002." Journal of Corporation Law 28 (fall). Read More