The Accountant's Responsibility for Fraud

This course is designed to qualify for 8 hours of CPE credit that may be applied to the fraud requirement. It may also be applied to the A & A requirement. In addition, the 8 hours may be allocated between fraud and A & A. It can be reduced to a 4-hour program.

Unlike the high profile fraudulent financial reporting incidents that have received national, and sometimes international, attention associated with publicly held entities, most nonpublic entities are more likely to be victims of fraud committed by employees, customers, or suppliers in the form of asset misappropriation, including possible collusion schemes.

There are many ways in which a CPA may be considered responsible for the prevention or detection of fraud. An internal accountant may be responsible for establishing internal controls designed to prevent fraud or to detect it on a timely basis. Regardless of whether performing a compilation, a review, or an audit, both clients and users of financial statements believe that the independent CPA's responsibilities include the detection of fraud. In addition, CPAs in public practice may assist their clients in performing a risk assessment and establishing internal controls in relation to the prevention and detection of fraud.

There are certain aspects of fraud that should be understood in order for the CPA to be effective, regardless of the capacity being served. The accountant should understand:

• How fraud is committed
• Who commits fraud
• How fraud might be prevented
• How fraud will be detected

Understanding the different schemes under which fraud is committed enables the CPA to identify the circumstances or conditions that would exist in order for it to be successful. It also enables the accountant to determine what signs would appear that indicate that such a fraud has occurred. This enables the accountant to establish procedures to prevent the conditions or circumstances conducive to fraud and to establish procedures for looking for those signs indicating it has occurred.

Fraud is committed by a variety of individuals and for a variety of reasons. Controls that may be effective in preventing one potential fraud perpetrator may not be effective for another. It is important to understand the different profiles of these perpetrators and what motivates each in order to develop controls that will be effective for each type.

Internal controls are often effective for the prevention of some fraud. Based on the motivation behind many fraud incidents, however, conventional controls are not always useful. In addition to the traditional internal controls employed by most entities, the prevention of fraud requires the development of controls that may be less conventional but are more specific to the types of fraud experienced by the entities involved.

Fraud detection requires a combination of a systematic approach, emphasizing those areas that represent the highest risks, as well as specific procedures designed for fraud detection. In many cases, this involves the development of expectations and comparing those expectations to reported results.

This course is designed to cover all aspects of the process, enabling the accountant to meet all applicable responsibilities in relation to fraud. Based on the needs of attendees, different segments may be added or deleted, and increased or decreased in emphasis. It involves the use of case studies for some areas and provides specific tools that may be applied to engagements.

The first step involves an understanding of the nature and characteristics of fraud. This involves understanding the different types of fraud schemes that may be perpetrated, how they are accomplished, and what signs would be evident indicating that they occurred. It also addresses the conditions under which fraud schemes will be successful, enabling the accountant to determine if those conditions exist and, as a result, whether or not that type of fraud could occur in that environment and what conditions should be avoided in order to prevent it.

The next step involves understanding the motivations that drive the different types of fraud perpetrators. Understanding the profile of each type of fraud perpetrator enables the accountant to know what to look for in each type of relationship and how to make certain that vulnerabilities are being reduced rather than increased. Different approaches are effective against different perpetrators and understanding the differences will enable the accountant to be more effective in the development of controls.

Most entities already have core systems in place. As a result, the development of controls is dependent on understanding the existing systems, being able to identify deficiencies in the systems, along with their potential effects, and evaluating where additional controls are necessary. This course provides a process for developing and documenting the understanding in such a manner as to make it easier to identify deficiencies and determine where additional controls are necessary.

In addition to traditional controls, an entity must consider controls that are uniquely effective for the prevention of fraud. This course also looks at some of the processes that have been used by companies as effective preventive controls.

Whether performing an audit of financial statements as an independent CPA or performing internal audit procedures to determine if internal control is effective, the detection of fraud requires a systematic approach that emphasizes areas representing the highest risks. This course provides a practical technique, including a spreadsheet approach, to applying the top down cumulative approach suggested by the risk assessment standards. It provides a means for determining where emphasis should be placed and is designed to make the process more effective while reducing the cost.