The Real Secret to Fraud Deterrence

By Joseph T. Wells

E-mail Story Print Story

This article explores the control dilemma in a different light.

• Pam, a recent high-school graduate, worked in a photo kiosk in a shopping mall parking lot. (This was before the advent of digital photography.) After being on the job only a few weeks, she had a small personal financial crisis. So she helped herself to a bit of the cash in the company’s register, and then a little more. To cover the thefts, Pam simply altered her cash count sheet that she turned in every day. Her scheme came to an abrupt end when an internal auditor conducted a surprise visit and uncovered the shortages. According to Pam, “I didn’t even know what an audit was before I was caught.” She knows now.
• A school district was having problems with students fighting, harassing drivers, and otherwise misbehaving on the buses. Without saying a word to the students, the district installed a video camera at the front of the vehicle to catch the miscreants. The children quickly spotted the unblinking eye and stopped acting up. But because the school lacked funds to install video cameras on every bus, it installed fake cameras on the rest of the buses as an inexpensive deterrent. The idea worked.
• A clerk in a major corporation was aware that a high-volume checking account had not been reconciled in three years. In her distorted thinking, she assumed that it never would be. But when it was, auditors found that the clerk had forged a check for $67,000 and deposited the proceeds into her own account. She was fired and prosecuted.

These seemingly dissimilar illustrations have important factors in common. In the two accounting cases, there was never the opportunity to commit and conceal fraud; only the perception. In the school bus example, there was a real chance to engage in misdeeds, but the students were held in check by their perception that they would be caught.

So it is not internal controls per se that deter fraud, but the perception that unlawful conduct will be detected. Simply stated, the perception-of-detection axiom is as follows: Those who believe their illegal activity will be detected are less likely to engage in it.

That logic is hard to fault. It also explains why the threat of punishment, no matter how severe, rarely deters crime. In the deliberate thought process of a white-collar criminal, the first question in the potential offender’s mind is not, “How much time will I serve if I’m caught?” but rather, “Will I be caught?” If the answer to the second question is “yes,” the crime is much less likely to occur. The next obvious issue is how internal auditors can increase the perception of detection.

Take a higher stance. Although auditors are an organization’s bellwether for good corporate conduct, many employees don’t know what they do. It is critical that workers be aware that auditors are, among other things, actively looking for fraud and abuse. Tell them.
Ask the tough questions. There are two ways to uncover fraud: stumble over it, or seek it out. Although analytical techniques and audit procedures may sometimes point in the right direction, they are no substitute for allowing honest employees to be an auditor’s eyes and ears. Do not hesitate to ask employees, in a nonaccusatory way, what they know or suspect.

Don’t hide internal controls. Employees can’t be dissuaded from committing fraud if they are not aware that internal controls are there to catch them. It greatly aids deterrence if workers perceive that there are control mechanisms in place. If there aren’t controls in place, this fact should be kept quiet. Remember, we’re talking about perception.

©2009 The New York State Society of CPAs. Legal Notices