Generally, when the following situations are presented to directors or Audit Committees, they lack the skepticism to see a fraud or interpret what could go wrong. Due to risk factors facing auditors they would not report a weakness or deficiency as a fraud. Therefore, those responsible for governance of companies should take such comments seriously and prevent a significant loss event.
Situation#1: Receipts or invoices are not in serial order
Potential Fraud: Skimming, which occurs when employees take money from receipts and don’t record the revenue on the books. A case on record is at hotels cash receipts are not booked and pocketed by the cashier in collusion with a senior team member.
Situation# 2: Revenue recorded does not comply with proper cut off procedures.
Potential Fraud: Manipulating sales figures so as to achieve budget and achieve bonus – a simple version of this involves booking sales in the next period in this period. The perpetrator will have to keep this up, to avoid an understatement later. Have tried pointing this fraud on incentives many times and avoided it in few instances.
Situation# 3: Inadequate supporting documents for payments made.
Potential Fraud: Falsifying supplier invoices or attaching photocopies. A case on record involved directors making payments without invoices and booking them as costs for work carried out for the company.
Situation# 4: Differences noted at the physical count of inventories.
Potential Fraud: Theft of stock, a perpetrator will over a period of time abscond with a number of items from the warehouse. So long as the stock losses are within tolerance, this remains a non issue for companies until it becomes significant over a period of time.
Situation# 5: The company does not have a registered suppliers list or a process for tenders.
Potential Fraud: Transactions that are not ‘arms length’ – when a company asks for tenders for a contract they usually obtain at least three quotes. The best value quote should then be selected. When the system does not run effectively, there is an opportunity for friends and relatives of the purchasing department to send in quotes that are accepted; bypassing the quotes from reputable suppliers.
Situation# 6: No proper procedures were noted for disposal of assets or no quotations were available for the sale of used motor vehicles.
Potential Fraud: Sale of company property at less than market value – this requires the collusion of at least two people (usually quite senior). Company property is ‘sold’ to one of the individuals at a bargain price approved by the other. This enables the buyer to sell it outside at a higher profit and split the benefit.
Situation# 7: The company does not trade with approved suppliers or the cost of similar assets purchased during the period are inconsistent.
Potential Fraud: Payoffs and kickbacks, employees accept cash or other benefits in exchange for access to the company’s business, often creating a scenario where the company that the employee works for pays more for the goods or products than necessary. This even applies for insurance contracts. That extra money finds its way into the employee’s pocket who helped facilitate the access.
Situation# 8: The company has capitalized revenue nature expenses into fixed assets.
Potential Fraud: Capitalized falsified costs, which involves personal expenses or fictitious costs being hidden through capitalization as part of capital work in progress and eventually transferred to fixed assets.
Situation# 9: Long outstanding receivables from related parties or unreconciled balances.
Potential Fraud: Related party frauds due to fictitious or inappropriate transactions being hidden in the related party account.
Situation# 10: long outstanding balances noted in the goods in transit account.
Potential Fraud: Overstatement of inventories, because the GIT account is not reversed to purchases and a higher closing stocks based on physical count will manipulate profits. The achievement of profit target will impact profit bonus to management.