logo-newlogo-newlogo-newlogo-new
  • Home
  • Blog
  • Audit Trail Academy
  • Advisory Services
  • Books
✕
  • Home
  • Chambers on Internal Audit
  • Uncategorized
  • Internal Auditors Must Remember: Good People Can Do Bad Things

Internal Auditors Must Remember: Good People Can Do Bad Things

You Don’t Have to Be a Clown to Audit the Circus
August 10, 2022
Internal Auditors Must Sometimes Break The Rules to Ask The “Right Questions”
August 24, 2022
August 15, 2022

When internal auditors think of fraudulent acts, we tend to associate them with nefarious characters who intentionally set out to do something bad. However, as I have explored in my books and blogs over the years, frauds or other illegal acts are often committed by otherwise good and decent people whose personal circumstances or “blind spots” somehow caused them to lose their way. These are people who often are under extraordinary financial or personal pressures outside of the workplace. Many times, they rationalize their initial actions and don’t intend for the frauds to morph into something as big as they eventually do. As internal auditors, we should not assume that everyone is doing bad things. However, our level of professional skepticism should remind us that even good people can do bad things.

The first time I stumbled onto a fraud was during my very first internal audit job at a major bank. Working in the bank’s internal audit department of proved to be a great learning experience for me. I learned about the internal audit processes and the financial services industry. I had a chance to do the local branch offices’ audits, which were fascinating. These were surprise audits, and the branch office was not notified that the internal auditors were coming. We all assembled about two blocks away from the branch office, and right at closing time we showed up at the front door. We were looking for any concealments, fraud or non-compliance with bank policies. It included a complete count of all cash in the vault and on the premises. Our audit had to be a surprise, because if they knew we were coming, some thefts could have been concealed.

Each internal auditor had an opportunity to audit one of the tellers. Each teller had his or her own bank, so to speak, in their cash drawer. At that time, the tellers had maybe two thousand dollars in cash that they would use each day, as their bank to work from.

On one occasion, I began my audit with a young female teller, and she did not even try to conceal what she had done with her money. She said, “I have an IOU in here for some money that I’ve been using.” It was my first eye-opening experience with a situation involving fraud. I came to learn that she was a “good person” going through a divorce who did not even comprehend that she had committed a serious fraud. In her mind she was going to pay the money back. She really didn’t feel like she was violating the law, but of course she was guilty of embezzlement.

The wayward bank teller may have been the first fraud I discovered or investigated, but it certainly wasn’t the last. Over the years, I would witness several more frauds perpetrated by individuals who were thought of as decent, good-hearted, and upstanding employees. I have discovered or investigated frauds committed by a junior member of the contracting department (to help pay for a family member’s medical bills), a single-mom treasurer of a not-for-profit association (who was out of work and needed money to help with family bills), and even an elderly church secretary(who was living on a fixed income). Each time, I felt a bit of sympathy for the person who had just destroyed their life. I wished I could have helped prevent the fraud I ended up investigating.

When it comes to fraud, internal auditors need to get there early. The Association of Certified Fraud Examiners’ (ACFE’s) Occupational Fraud 2022: A Report to the Nations estimates the global cost of internal fraud at US $4.7 trillion, or 5 percent of total revenue. And, as we all know, internal fraud is only part of the picture.

Everything is moving faster these days, including fraudsters. Today, a rogue employee with a smart phone, given a weak enough control environment, can transfer significant sums of money out of a company’s accounts in the blink of an eye. According to the ACFE, the median loss per occupational fraud case is $117,000. Little of that money is ever recovered.

To be successful at detecting fraud, it is important that we understand exactly what fraud is. The IIA’s Standards defines fraud as: “Any illegal act characterized by deceit, concealment, or violation of trust. These acts are not dependent upon the threat of violence of physical force. Frauds are perpetrated by parties and organizations to obtain money, property, or services; to avoid payment or loss of services; or to secure personal or business advantage.”

Detection technology is advancing as rapidly as fraud, with real-time transaction monitoring exposing anomalous patterns that otherwise might go undetected. Means for collecting tips (e.g., hotlines) and a robust internal audit function also have been shown to be effective fraud detectors. Detection, however, should never be the first line of defense.

In fraud, as in health care, an ounce of prevention is worth a pound of cure. Donald R. Cressey, the late criminologist, is credited with identifying the three ingredients required for fraud: motive, opportunity, and rationalization. Today these are collectively known as The Fraud Triangle. With appropriate risk assessment and controls, an organization can effectively shrink the “opportunity” side of the triangle.

As internal auditors today, we must be prepared to identify fraud effectively. As The IIA Standards convey, “Internal auditors must have sufficient knowledge to evaluate the risk of fraud and the manner in which it is managed by the organization, but are not expected to have the expertise of a person whose primary responsibility is detecting and investigating fraud.”

Later in my career, I would become a United States federal Inspector General (IG). I had a key responsibility to prevent and detect fraud in my agency. I was fortunate to lead a well-resourced cadre of auditors and criminal investigators. In retrospect, I would give us high marks for our ability to detect and investigate instances of fraud that had already occurred. However, I always felt that the real opportunities where fraud was concerned was to have been more effective in prevention. Leveraging our knowledge of fraud risks and getting in early, before the frauds occurred, would have added so much more value.

Whether as a junior internal auditor in a bank or a federal IG, I came to understand that I was auditing people too. By nature, people are sort of flawed—they can do dumb and sometimes dishonest things. Interviews with persons who committed fraud have shown that most people do not originally set out to commit fraud. Often, they simply took advantage of an opportunity; many times, the first fraudulent act was an accident—perhaps they mistakenly processed the same invoice twice. But when they realized that it wasn’t noticed, the fraudulent acts became deliberate and more frequent. Fraud investigators talk about the 10-80-10 law, which states that 10 percent of people will never commit fraud; 80 percent of people will commit fraud under the right circumstances; and 10 percent actively seek out opportunities for fraud. So, we need to be vigilant for the 10 percent who are out to get us and we should try to protect the 80 percent (who are often good people) from making a mistake that could ruin their lives and cost our organizations millions of dollars.

Share

Related posts

January 31, 2023

Recent Advice on Hiring Internal Auditor’s You Can ‘Trust’ Is Misdirected


Read more
January 24, 2023

Do Performance Bonuses Impair Internal Auditors’ Independence and Objectivity?


Read more
January 16, 2023

Are Internal Auditors to Blame When Boards Are in the Dark?


Read more

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

What’s Trending

01-31-23

Recent Advice on Hiring Internal Auditor’s You Can ‘Trust’ Is Misdirected


01-24-23

Do Performance Bonuses Impair Internal Auditors’ Independence and Objectivity?


01-16-23

Are Internal Auditors to Blame When Boards Are in the Dark?


Read More

Archive

  • January 2023
  • December 2022
  • November 2022
  • October 2022
  • September 2022
  • August 2022
  • July 2022
  • June 2022
  • May 2022
  • April 2022
  • March 2022
  • February 2022
  • January 2022
  • December 2021
  • November 2021
  • October 2021
  • September 2021
  • August 2021
  • July 2021
  • June 2021
  • May 2021
  • April 2021
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • October 2018
  • September 2018
  • August 2018
  • July 2018
  • June 2018
  • May 2018
  • April 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • October 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • November 2013
  • October 2013
  • September 2013
  • August 2013
  • July 2013
  • June 2013
  • May 2013
  • April 2013
  • March 2013
  • February 2013
  • January 2013
  • December 2012
  • November 2012
  • October 2012
  • September 2012
  • August 2012
  • July 2012
  • June 2012
  • May 2012
  • April 2012
  • March 2012
  • February 2012
  • January 2012
  • December 2011
  • November 2011
  • October 2011
  • September 2011
  • August 2011
  • July 2011
  • June 2011
  • May 2011
  • April 2011
  • March 2011
  • February 2011
  • January 2011
  • December 2010
  • October 2010
  • September 2010
  • August 2010
  • July 2010
  • June 2010
  • May 2010
  • April 2010
  • March 2010
  • February 2010
  • January 2010
  • December 2009
  • November 2009
  • October 2009
  • September 2009
  • August 2009
  • July 2009
  • June 2009
  • May 2009
  • April 2009
  • March 2009
  • February 2009

Contact Us

PO Box 1441
New Smyrna Beach, FL 32170

+1-407-463-9389
rchambers@richardchambers.com

About AuditBeacon.com

AuditBeacon.com is a resource center for internal auditors and risk professionals from around the world. In addition to more than 500 blogs authored by Richard Chambers, the site includes links to news and insights on internal audit and other information that illuminates the value of this important profession. AuditBeacon.com is provided as a service by Richard F. Chambers and Associates, LLC.

Copyright © 2023 Richard F. Chambers & Associates. All Rights Reserved.
  • Home
  • Blog
  • Audit Trail Academy
  • Advisory Services
  • Books