By: Jim Keeslar, CPA

“Trust but verify.” Three simple words. Fourteen letters. Pretty basic, but oh, so important, especially in the times we find ourselves in. In the last five years we have seen greed topple some large corporations and some seemingly powerful individuals. Now during a prolonged recession, we at BCG & Co. have seen a significant uptick in fraud. And I am not talking about stories in the newspapers about someone somewhere else. I am talking about right here in Akron, Ohio! We have seen use of corporate credit cards for personal expenses, the altering of documents to support invalid expense reimbursements, checking account theft, the theft of corporate funds meant for retirement funding and fictitious numbers being reported to a bank. Five different fraud schemes in the last three months alone! Years ago, there was a time when we would go a year or two before investigating a potential fraud scheme. So why so much activity now? Well, the economy has put a great deal of additional pressure on individuals causing them to do things they wouldn’t have thought of before.

For more on this whole topic, I have to look no further than our own “fraud-buster”, Ray Dunkle, who is a Certified Fraud Examiner (Ray also provided me with the title for this article). Ray noted, “many people think, ‘it won’t happen to me.’ Then before you know it, you hear them saying, I can’t believe it! He has been a long-time employee, a great performer. I never thought he would steal from me!” Ray goes on to say, “you don’t hire people expecting them to steal from you. You have to have some trust, but you must also be skeptical”.

So as an employer or board member, what are you to do? Again, I turned to Ray. “First, and foremost, make sure the organization has adequate internal controls. Controls are not just for large companies and you can’t be too small for some form of controls. Proper internal controls can help deter and detect theft. An audit is helpful, but it doesn’t always detect fraud. We are seeing more companies that are implementing internal audit procedures—either themselves or contracting with firms such as ours. Controls are important, but you want to perform periodic tests of those controls to make sure they are functioning properly. Internal audit procedures will do just that.”

I asked Ray for a closing thought and he said, “You know, companies will spend money on fire insurance or general liability insurance hoping they will never need it. Companies need to understand that spending money to prevent fraud and to detect honest, but costly, mistakes is no different. Putting controls in place or having internal audit procedures performed on a periodic basis will have a cost associated with it. But just like a fire, if theft hits, it will be more costly than what you would pay to “insure” against it. I would also add, trust is not a control, but a feeling. It is ok to trust, but remember to verify!”

Serving the Need, Not Checking the Box
[This article is for individuals associated with organizations having audit committees.]

Frequently, Audit Committees are thrown together more in a check the box response to a required procedure and less in a desire for strong corporate governance. As a result, Audit Committees often gather once a year only to hear an often routine report from the outside accountants. With the growing understanding of the importance of appropriate corporate governance, we thought our readers would appreciate knowing practical areas that Audit Committees should be considering:

Awareness the Audit Committee should be challenging their own awareness of:

• Ethics and the opportunity for fraud within their own organization,
• Fraud and fraud fighting procedures…procedures that may also uncover honest but costly mistakes,
• Organizational controls, their appropriateness and their effectiveness, and
• The organization’s prior experience with the detection of errors and fraud and the organization’s response to it.

Oversight - the Audit Committee should be taking an active role in directing:

• The monitoring of managements financial activities,
• The guidance of the internal audit function,
• The implementation of error/fraud prevention and detection programs, and
• The reporting of such activities to the Board and/or ownership.

Self-Assessment the committee should ensure that it is functioning as an audit committee and not as a passive body of listeners to an outside auditors report. Tools such as self assessments, formal written surveys and feedback from management and auditors can help ensure that the Audit Committee is effective and engaged.

Ready for your revival? The most important part of jumpstarting your committee is having everyone make a commitment to embrace changes for the good of your organization, changes that will protect and ensure the longevity of the entity. A first step can be finding an experienced facilitator who will lead the group into uncovering and addressing some key areas for improvement and who can assess the current committees knowledge and commitment to the points above. Effective retreats will study hypothetical ethical dilemmas and evaluate the committee members responses to them. They will also provide an overview of fraud and common methods used to commit it, summarize error and fraud prevention and detection techniques, identify specific industry risks and exercise brainstorming to address a response to the days findings. For more information on how to jumpstart your Audit Committee or how to develop a retreat customized to your organization contact me via phone (330) 572-8046 or email.