UNCOVERING THE FRAUD TRIANGLE AND OTHER MISCONDUCT
By PAUL REYES, CPA BEDERSON LLP
MATTHEW SCHWARTZ, CPA/ CFF, CFE, CIRA
TIMOTHY KING, CPA/CFF, CFE
BEDERSON LLP
BEDERSON LLP
Accountants are relied upon to uncover fraud across a number of disciplines, including, audit, attorney trust accounting and bankruptcy. Here are some of the warning signs as well as tips for preventing fraud.
AUDIT From an auditor’s point of view, fraud risk is a major factor. It affects every stage of the audit, from planning to performance and, finally, completion. Three factors, commonly referred to as the “fraud triangle,” can lead to fraudulent acts within an organization: Pressure, opportunity and rationalization. y Pressure is represented by a financial or emotional force that pushes one toward fraud. This may be difficult for the organization to foresee, as an employee’s personal finances and motivations cannot easily be ascertained. Knowing about employees can help reduce this vulnerability to fraud. For example, background checks can be run on new employees. It is also important to make sure vacation time is taken annually. When an employee does not take time off, it is possible they are doing so to enable the concealment of fraud. y Opportunity is an ability to execute a plan to commit fraud without getting caught. Maintaining good internal
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SPRING 2022 | NEW JERSEY CPA
controls can mitigate this factor. Segregation of duties, (e.g., not having the same employee handle the processing of receipts from customers and the authority to approve write-offs or managing petty cash and recording the transactions in the accounting system) is imperative. Additionally, restricting access to certain financial data and closely watching bank account activity for suspicious transactions is paramount to limiting opportunities to commit fraud.
y Rationalization is a personal justification for the dishonest actions. An employee who feels underappreciated or undercompensated can be motivated to commit fraud. Combined with opportunity, this factor can be one of the most compelling. Like pressure, rationalization can be difficult to see coming. But fraud committed by long-term employees who do not receive the desired acknowledgement, advancement or monetary compensation happens more frequently than an employer might expect. Understanding how fraud can occur is important. The fraud triangle can be a valuable tool in detecting it if it does exist and preventing it in the future. ATTORNEY TRUST ACCOUNTS Accountants are rarely asked to be involved in their attorney clients’ trust accounts until there is a problem — and that problem is often an ethics complaint, either from a client or the New Jersey Office of Attorney Ethics. Either way, an ethics complaint is a claim that an attorney has misappropriated client funds and thus violated both the New Jersey Rules of Professional Conduct
