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Pressures and Incentives
Living beyond their meansOverwhelming desire for
personal gainHigh personal debt
Close association with customers
Feeling pay not commensurate with responsibility
Wheeler-dealer attitude
Strong challenge to beat the system
Excessive gambling habits Undue family or peer pressure
No recognition for job performance
Opportunity
Placing too much trust in key employees
Lack of proper procedures for authorization of transactions
Inadequate disclosures of personal investments and
incomes
No separation of authorization of transactions from custody of
related assets
Lack of independent checks on performance
Inadequate attention to details
No separation of custody of assets from the accounting for
those assets
No separation of duties between accounting functions
Lack of clear lines of authority and responsibility
Department that is not frequently reviewed by internal
auditors
Perception of detection is biggest deterrent to fraud
Rationalization
Not about justifying theft that has already occurred
Necessary component of crime before it takes place
Part of the motivation for the crime
After criminal act has taken place, rationalization will
often be abandoned
Once line is crossed, illegal acts become more or less
continuous
City of Dixon
Small Midwestern city with 16,000 residents
Childhood home of Ronald Reagan
General fund budget of $10 million
Audit and bookkeeping fees of $40,000
Small staff, part-time council, no City Manager
Rita Crundwell
Hometown resident
Began working at the city after high school in 1970
Named comptroller in 1983
Trusted employee and community member
Horse breeding employed a number of residents
The Fraud
Opened a non-authorized bank account in the name of the City in December 1990
Prepared fictitious invoices for infrastructure reimbursement to the State
Wrote checks for payment on fictitious invoices payable to “Treasurer”
Deposited those checks into unauthorized account
Went shopping for clothes, jewelry, cars, motorhomes, property, horses, and unusual home furnishings…
The Fraud
Total fraud exceeded $54.0 million
Fraud exceeded $5.6 million in 2008
179 fictitious invoices prepared
Most all fictitious invoices in even amounts
Fraud continued after initial identification until her arrest
Auditor Responsibilities
The auditor obtains reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due
to fraud or error.
To obtain reasonable assurance, which is a high but not absolute, level
of assurance, the auditor identifies and assesses the risks of material
misstatement, whether due to fraud or error, based on an understanding of
the entity and it environment, including the entity’s internal control.
Due to the inherent limitations of an audit, an unavoidable risk exists that
some material misstatements of the financial statements may not be
detected, even though the audit is properly planned and performed in
accordance with GAAS
Responsibility for Prevention and Detection of Fraud
The primary responsibility for the prevention and detection of fraud rests with
both those charged with governance of the entity and management. It is
important that management, with the oversight of those charged with governance,
places a strong emphasis on fraud prevention, which may reduce opportunities
for fraud to take place, and fraud deterrence, which could persuade individuals
not to commit fraud because of the likelihood of detection and punishment.
This involves a commitment to creating a culture of honesty and ethical
behavior, which can be reinforced by active oversight by those charged
with governance. Oversight by those charged with governance includes
considering the potential for override of controls or other inappropriate
influence over the financial reporting process, such as efforts by management to
manage earnings in order to influence the perceptions of financial statement users
regarding the entity's performance and profitability.