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Fraud detection and investigation for the CFO and finance team
29 July 2022 | Minutes to read: 3

Fraud detection and investigation for the CFO and finance team

By Sean Wengel

Detection of employee fraud sits squarely within your remit as a CFO, and evidence shows that it’s increasing both in occurrence and severity, with the pandemic having created new opportunities for fraudulent activity.

Recent data collated by the Association of Certified Fraud Examiners in its report Occupational Fraud 2022: A Report to the Nations suggests that a typical fraud case lasts 12 months before detection and costs an organisation in the Asia-Pacific region AUD $175,000.

Nearly half of the cases examined in the report occurred due to a lack of controls or an override of existing controls. Interestingly, 81% of victim organisations modified their anti-fraud controls following the fraud. This suggests that existing controls were deficient and needed to be improved, which unfortunately only occurred once the fraud had been detected.

Behind corruption, the most common forms of fraud in organisations in the Asia Pacific are billing fraud, non-cash fraud and expense reimbursements.

The longer a fraud goes undetected, the greater the cost to the organisation. This makes proactive fraud detection and deterrence a highly worthwhile exercise.

In this article, we will explore some techniques and financial tools you’ll be familiar with as a CFO or financial professional, and how they can be applied to identify potential fraud in your organisation or to assist in a fraud organisation.

You’ll find more on the different types of workplace fraud including asset misappropriation, corruption and financial statement fraud in our article How to detect and prevent increased employee fraud in the ‘new normal’.

How is fraud identified?

An organisations culture, employee education and recruitment standards should be designed to discourage the likelihood of employees committing fraud. It is inevitable though that some organisations will fall victim to fraud.

Most occurrences of employee fraud are identified by a tip-off or through an internal audit.

You can also increase the likelihood of uncovering fraud by benchmarking financial data internally and against industry norms, paying close attention for any anomalies. Coupled with analysis of financial ratios this is a powerful tool for detecting and investigating suspected fraud in your organisation.

Once a fraud is suspected, the management, CFO, or CEO should engage a suitably qualified professional, such as a registered auditor, certified fraud examiner or registered liquidator, to assist in the ensuing investigation.

Using financial ratios to investigate fraud

The use of financial ratios to investigate suspected fraud is a method used by fraud investigators, CFOs and management with access to the organisation’s financial statements.

Some of the financial ratios that might be used as secondary indicators of a fraud having occurred include:

  1. Current ratio:
    Theft of inventory, cash or other liquid assets can be identified by a decrease in the current ratio. Inversely, unreported liabilities can cause an increase.
  2. Quick ratio:
    By excluding inventory in this ratio, a more conservative view of liquidity is presented. Changes to this ratio can indicate manipulation of accounts payable and accounts receivable.
  3. Accounts receivable turnover:
    Changes to this ratio can indicate manipulation of accounts receivable, such as fictitious sales being entered.
  4. Accounts receivable ageing (collection ratio):
    A lowering collection ratio can indicate fictious receivables or skimming.
  5. Debt to equity ratio:
    Due to the importance of this measure to lending institutions and its relevance to covenants on loan facilities, particular attention should be paid to manipulation of this ratio’s inputs.
  6. Profit margin:
    Fictitious expenses can cause a decrease in the profit margin and fake sales can cause in increase in the margin.
  7. Asset turnover:
    Unexplained changes in the asset turnover ratio between periods and assessment against industry benchmarks can indicate falsification of sales or receivables.
  8. Inventory turnover: 
    Changes in inventory turnover between periods can indicate manipulation of physical inventory.
  9. Average number of days of inventory in stock:
    Changes to number of days stock remains in inventory can be an early indicator of theft.

The ratios mentioned above can all be used to help identify potential fraud and to assist in the investigation process. These indicators should be considered in conjunction with a properly planned and executed fraud investigation plan.

After the fraud

Once a fraud has been identified and investigated, the organisation’s fraud prevention activities should be revisited. Internal controls must be reviewed and improved where necessary, preferably with the input from external professionals suitably qualified in fraud prevention.

To discourage fraud from occurring again in the organisation, management, the CFO and CEO should consider how their culture encouraged the fraud to occur in the first place. Addressing the following issues can reduce the likelihood of workplace fraud occurring again:

  • Reduce pressures to commit fraud, such as bonuses linked to financial indicators
  • Remove potential opportunities to commit fraud, such as loose internal controls, and
  • Relieve possible rationalisations to commit fraud, such as management treating employees poorly.

Executives and management should engage with a suitably qualified external, independent examiner to verify suspicions of fraud and complete an independent investigation.

Only approach the suspect with a suitably qualified professional and as part of a well thought out fraud investigation program.

We have demonstrated experience assisting organisations with the detection, deterrence and management of fraud related instances. Please call your William Buck advisor.

Fraud detection and investigation for the CFO and finance team

Sean Wengel

Sean is a director in the Restructuring and Insolvency division. Sean is a turnaround specialist, registered liquidator and trustee in bankruptcy, who specialises in corporate and personal solvency related matters, restructuring and the liquidation of solvent companies. Sean works closely with William Buck's in-house full service accounting and advisory experts to deliver Safe Harbour turnaround strategies, helping directors save struggling businesses and mitigate personal risk.

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