Detecting and preventing fraud is a crucial aspect of ensuring the financial health of an organisation. The directors of a company are responsible for putting in place the internal controls to prevent and detect fraud and safeguarding the assets of the company. An auditor has the responsibility of assessing and responding to the risk of fraud which may result in a material misstatement to the financial statements.
Fraud is intentional and involves deception. It is somebody who is intentionally taking money or other assets and altering records to hide this or where they have deceived a person or a company in order to receive that money.
There are two types of fraud that will be discussed: Fraudulent financial reporting and misappropriation of assets.
Fraudulent Financial Reporting
Fraudulent financial reporting tends to be done by management or the directors and occurs by the directors/management manipulating the financial statements for a particular reason. For example, they need to apply to the bank or investors for funding and they want their financial statements to present a better outlook in order to get more funding out of the investors or to get a better rate out of the bank.
Fraudulent financial reporting also covers tax avoidance issues. So, if one is understating revenue because one does not want to pay the tax on it, that's fraudulent.
Misappropriation of Assets
Misappropriation of assets tends to be by employees. Management can also do it, but it tends to be by employees taking cash out of the register, taking an item of inventory home with them, false expense claims, or creating false purchase invoices.
What to Do if Fraud is Identified/Suspected
If an auditor suspects fraud, they need to do a little bit more work to see if their suspicions are founded or not. Can they identify the person that is committing the fraud? How much is involved? How long has it been going on? They may need to get a specialist's advice depending on the level of fraud and the auditor's level of skill as well. But one would initially do a little bit more work to get as much information as they can as the auditor. And then once they've got it, they need to consider the impact on the financial statements, the audit report and reporting to third parties.
Studies have shown that a recession or decrease in the economy always comes with an increase in fraud. The cost-of-living crisis really puts more pressure on people to maintain their lifestyles, to pay off their debts. And that pressure can result in some people looking for alternative ways to get their hands on money. Auditors must be diligent in their efforts to identify potentially fraudulent activities and document their findings thoroughly.
If you require assistance or advice in relation to any of the above matters, please contact our team on 053 91 000 00 or email [email protected].