by
James Leisner, CPA
Director, Corporate Services
StoneBridge Business Partners
Reprinted with permission from Fraud Matters Newsletter
of CPA
America.
Collusion – a secret agreement between two or more
individuals for a deceitful or fraudulent purpose –
is one of the most difficult types of fraud to expose.
Auditors routinely excuse themselves from the responsibility
of detecting fraud, collusion in particular. It is difficult
enough to uncover fraud when it is committed by an individual,
but detecting a team of individuals working together to defraud
an organization can be especially difficult.
What steps can you take to detect and deter collusion?
Every organization should have a written and communicated
policy regarding fraud: It will not be tolerated, it will
be sought out and violators will be terminated. Employees
should know they will also be swiftly prosecuted.
Tough words require tough actions. If only restitution is
required, the message is, “The worst that will happen
is I have to pay the money back.”
Require disclosure of relationships and awareness of organization
policies – both inside and outside the organization.
This should be obtained from all employees and members of
the board of directors. It should be updated annually.
Inform suppliers and vendors that gifts and gratuities to
employees of the organization are prohibited, and that they
are encouraged and expected to notify the organization of
any inappropriate behavior by its employees or agents.
Provide a means for individuals to report suspicious behavior
and irregularities. Suspicious activity is often noticed by
those outside the organization. Your organization needs eyes
and ears – inside and out – to observe and hear,
and a means to inform you, either by a phone call, voice mail
box, Web page, e-mail, mail, personal contact or anonymously.
These tips need to be directed to a central point where investigation
can follow.
A recent example of a whistleblower exposing a collusion scheme
was the massive Roslyn (Long Island) School District fraud.
A Home Depot employee questioned why an individual was using
the school district’s credit card for items that appeared
to be for a residence. The card was being used at a Home Depot
well outside the geographic area of the school district.
More than 20 individuals were abusing the district’s
funds, and their outside auditor was helping to conceal the
abuse. An outside whistleblower not only alerted the public
and helped bring an end to the conspiracy, but led to a statewide
audit initiative that will impact all school districts throughout
New York State.
Potential abuses include one employee perpetrating a fraud
while the other provides authorization. Examples include an
overstated expense report and overstated work hours and payroll.
The excess is shared between the perpetrators.
Budgets establish expected results. Variances from the expected
should be investigated. Investigating expenses in excess of
a predetermined budget can lead to detection.
A review of payroll might generate such questions as, “Why
is this employee incurring overtime but others are not?”
Surprise distribution of paychecks and spot checks for the
existence of employees by someone other than the immediate
supervisor might also reveal the perpetrators.
Analytical review can detect fraud and collusion. What are
the expected results for revenues, gross profit margins and
expenses? Why are those results expected, and why do actual
results differ? Monitoring gross profit margins may detect
collusion between a sales clerk and customer in which the
customer is undercharged for items or issued excessive refunds
for merchandise. Surveillance cameras and review of customer
patterns and transactions may detect unusual activity.
Segregation of duties has been a cornerstone of effective
internal controls and the deterrence of fraud. Management
relies on each individual to be independent and act as a check
or balance. In the case of collusion, individuals are failing
the organization. If collusion does exist, periodic rotation
of personnel and duties changes the relationships and conditions
that permitted the collusion.
When employees and those outside the organization perceive
that controls are in place and are tested, they may be deterred
from fraud or theft.
Periodically evaluate and test internal controls. Interviewing
personnel tells you what should be occurring; testing helps
prove or disprove it.
Are incoming receipts immediately recorded and controlled?
Is there support for disbursements? Is that supporting documentation
reviewed and approved?
The perception that events and results are being monitored
and evaluated can detect, as well as deter, collusion and
fraud.
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