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A few years ago, one of our audit clients was the victim of fraud when an employee embezzled cash receipts. The fraud was made possible by a combination of unusual circumstances and errors in management judgment.
As we started the annual audit of our client’s financial statements, we learned that the long-time controller had decided to retire. He did not want to leave the company in a bind, so he offered to stay on until the audit was completed. By late April we had completed the audit and issued our report so the controller began his retirement. Although senior management of the company had been given adequate notice of his departure, we observed that they had not yet lined up a replacement.
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How Solid are your Internal Controls?
Fraud in the workplace has become a major topic of conversation over the past few years. It seems that frauds of various types are being reported at a rate far greater than just a decade ago. Are there really more frauds being committed today than ten years ago, or are we just getting better at finding them?
Whatever the answer to that question is, it is clear that one of the best methods of detecting and preventing fraud is a strong system of internal controls. According to studies done by the Association of Certified Fraud Examiners, 19% of detected frauds are uncovered by internal controls. In comparison, only 12% are uncovered by audits. This does not mean that audits are ineffective. This finding occurs because organizations that have strong internal controls are able to detect and stop frauds before the auditors start their work. And, of course, earlier detection normally means smaller losses for the organization.
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