Reasons Why Audits & Field Examinations Fail to Detect Fraud

By Elizabeth C. Askew, CPA – Vice President / Team Manager, LCG Advisors

It’s estimated that employee fraud cost businesses approximately $400 billion per year in the United States. When it comes to fraud detection, no field examination or audit is foolproof as fraud has a way of staying hidden by its very nature. Uncovering fraudulent activity during an audit or field examination requires a trained, skeptical eye, open communication with staff, and the skill to approach each engagement using a fresh approach every time.

Having conducted over 4000 field examinations using a range of financial instruments and accounting methodologies, we understand that each requires a customized approach; however, there are several best practices that should be observed as a foundation for any field exam:

1. Know the industry:
If you do not understand the industry, transactions, company or accounting systems, it is difficult to know what areas require further scrutiny and what types of fraudulent activity to look for in your audit and field examination. Industry research prior to the commencement of the engagement is critical.

2. Know where to look:
Many individuals or companies committing fraud understand what the auditors / field examiners are looking for and use that knowledge and experience to their benefit. It is important to study previous instances of fraud, especially industry related, and drill down in common (and some uncommon) areas of concern.  An individual or company will be less likely to commit fraud in the first place if they know they will have to answer to a professional with experience in detecting fraud.

3. Don’t take the same path twice:
Once an individual or company commits some sort of fraudulent activity once, those involved in fraudulent activities tend to repeat the activity and scale it over time. As mentioned above, many of those individuals or companies committing fraud use prior knowledge to deceive auditors and field examiners.  They understand the testing involved and can manipulate their systems or processes around those testing to gain favorable results.  Altering methodology, such as sample selections, expanding the company interview process, and creating innovative data mining and analysis techniques are all important for ongoing fraud detection and prevention.

Any professional can tick and tie or reconcile data.  However for fraud detection, it involves much more than that.  It involves a healthy dose of professional skepticism, confidence to have difficult conversations, and the willingness to dig deeper to ensure the results of the data and the interview all line up in looking at the big picture.

LEARN MORE: To learn more about LCG Advisors Field Examination capabilities, please click here.