Fraud in the executive suite - Fraud Findings

Internal Auditor, Oct, 1993 by Courtenay Thompson

4. Even good internal controls can be circumvented. Well-conceived systems can be defeated by collusion or management override. Effective internal audit and detection controls are the most reliable defense against empowered individuals who would abuse their authority for personal gain.

5. Include a right-to-audit provision in all contracts. The fraud would have been much more difficult to prove without access to the contractor's books and records. In this case the contractor eventually cooperated, even though there was no right-to-audit provision in the contract.

6. Contracts that designate others to keep books and records provide opportunity to disguise improper payments. In this case the improper payments were for the benefit of executives controlling the contract. In other cases inflated payments to contractors, vendors, consultants, attorneys, and health benefits administrators have been used to pay off government employees and elected officials, regulators, union officials, and members of organized crime.

7. Listen to cover stories, and then follow through.

The vice president told the auditors that he and the president were very interested in the appearance of the corporate office, hence their personal interest in the contract. The contractor explained the high cost as the result of adverse site and soil conditions. A "show-me attitude" can help auditors validate authentic explanations or disprove a sham cover story.

8. Don't sweep it under the carpet. After this fraud was uncovered, management had to decide whether to endure the adverse publicity that usually occurs when a company makes public disclosure of internal executive fraud, or whether to risk a future public relations disaster in the event of unplanned revelations of a corporate cover-up. Management chose wisely.

1. In "Auditing Pension Plan Investments," Roy E. Reed Jr. suggests that the typical contract between a plan sponsor and an investment manager should cover all of the following except.

a. Bonding requirements.

b. investment guidelines.

c. Performance expectations.

d. Responsibilities of auditors.

2. In "Inside the Audit Committee," Mary S. Metz suggests that the worst enemy of an audit committee is:

a. The Securities and Exchange Commission.

b. A compliance review.

c. Complacency of its members.

d. Increased liability for directors.

3. Metz also states that an audit committee's greatest concern regarding internal controls is:

a. Security and adequacy of controls over computer-related arenas.

b. Security and adequacy of controls over cash.

c. Proper training of the internal audit staff.

d. Good judgment and common sense exhibited

by the internal audit staff in its evaluation of

controls.

4. Charles Bowsher, interviewed in Calling the Tough Shots," indicates that he would prefer auditors to concentrate more on the:

a. Internal controls and risk areas of an entity.

b. Financial statements as of the balance sheet

date.

c. Directives of the audit committee.

d. General audit standards.

5. "What Do Internal Auditors Need to Know?" cites recent research showing that as an internal auditor advances in an organization, the following competency becomes increasingly important: