Is someone in your bank ripping it off? Spotting fraud in rough and tempting times
Posted on April 9, 2010
The Complete Guide to Spotting Accounting Fraud & Cover-Ups, By Martha Maeda, 336 pp., Atlantic Publishing Group, Inc.
Reviewed by Richard P. Kozlow, Senior Managing Director, Watkins Consulting, Inc., Washington, D.C. Kozlow has over 35 years experience as an executive in leading financial services and public accounting firms in the U.S. and abroad. A consultant for over eight years, he specializes in internal control and risk advisory services to the financial services industry. (
Fraud-if you’ve ever lost money to one, it’s an experience that violates you personally in a way that you never forget. If you have seen a (formerly) trusted colleague convicted of it, you always remember your complete disbelief upon first hearing of it. When you read about it in the headlines, you find yourself shaking your head and wondering why no one could see that they were being duped.
Fraud has this air of mystery, even fascination, about it that draws us in and keeps us reading the story until the end. It is the subject that so many find terribly interesting but so few know much of anything about.
Martha Maeda’s Complete Guide to Spotting Accounting Fraud & Cover-Ups focuses on “occupational fraud.” Maeda’s aim is to close the knowledge gaps of the exposed and uninitiated—and especially those who need to have a quick overview of fraud from A to Z. It is not, nor does it claim to be, a definitive or comprehensive guide to fraud detection and prevention. However, if you want to get a quick, readable overview of the subject, with enough detail to allow you to dig deeper, this book could be what you’re looking for. It is also an eye-opening and relatively easy read that is well-organized and loaded with diagrams, checklists, and outside source materials.
There are frequent references to headline frauds and case studies, including the Madoff scandal and Enron, as well as many others that, while not garnering the big headlines, illustrate how ubiquitous the problem of fraud really is. (For a taste of Maeda’s findings, click here for major fraud types, and click here for key fraud statistics.
Maeda breaks down the subject into four major parts:
• A general discussion of occupational fraud
• A more-specific exploration of the various types of fraud
• Fraud detection techniques
• Prevention techniques
The book opens with a discussion on “Who Commits Fraud?” If you have not worked in senior positions in audit or finance, this section will provide some valuable insight into the frequency of frauds and how often they are committed by “trusted” colleagues. The discussion of fraud types covers several chapters and is an excellent primer on the basics. Throughout the book, the author also uses “Red Flag” listings that provide basic fraud warning sign checklists.
It is at this point that the reader may begin to be overwhelmed by the sheer volume of descriptions and sub-categories of fraud. In one way, however, that helps make a critical point. The creativity of those who perpetrate fraud is unlimited and new schemes are constantly being devised, often harnessing new technologies to commit frauds that are more efficient and more widespread. On the other hand, if your objective was to either develop a fraud detection and prevention program or evaluate one, you could quickly become mired down in too many checklists.
This is where one weakness of this book becomes apparent. The chapter devoted to “Conducting a Fraud Risk Assessment” is very brief and barely touches on how to deal with the problems often encountered at this stage: expense, time involved, and the challenge of putting together the right team to help with the assessment.
An aside here: In my many years of working in both public accounting and the banking industry, the biggest challenge by far, has always been gaining management commitment to seeing the need for and adequately funding a fraud prevention and detection program before a problem occurs. One technique that has worked: integrating a fraud detection program into a more robust business results management and data analysis program. Connecting top management’s focus on the bottom line with the robust analytics that can often pick up emerging unusual (and sometimes fraudulent) activities can be a very effective approach.
From my own experience, I recall using data analysis techniques while examining the loss tracking activities at a major bank in the late 1990s, in what started out as a project looking for efficiencies, and eventually uncovered one of the first instances of identity theft before it was widely recognized as such.
Indeed, author Maeda includes a very good description of ratio analyses and data mining techniques that could be used in this way in Chapter Nine. In this regard, she also provides a useful list of helpful software packages.
The chapter on “Conducting A Fraud Investigation” is somewhat brief, and might usefully address in more detail both the need for quick action and the importance of involving legal counsel and Human Resource professionals at the very outset of a potential fraud investigation. Failure to have a coordinated plan of action already in place that calls for a team effort can result in loss of evidence; an inability to prosecute perpetrators; and, in the worst cases, a suit by the implicated employee for wrongful dismissal.
There can also be danger in cornering an employee over fraud. I recall at least one instance while searching an employees’ desk during the course of an investigation, when I came across a recently issued gun permit!
Having an established plan defining roles and responsibilities in the event of the discovery of a potential fraud is a bare minimum that every firm should have.
Overall, Maeda’s book is an excellent overview on fraud. There are a number of other books on this subject, but they are mostly more technical in nature. This work does a good job of covering a broad and complex area in its 336 pages.
In addition to covering many details of fraud schemes and methods for detecting and preventing them, it touches on some of the biggest “enablers” of fraudulent activity that are particularly relevant during times of economic stress: putting more trust in employees due to reduced workforces; pressure to do more; personal financial stress being experienced by key control staff; systems that are undocumented, and/or out of date due to a lack of funds; and businesses struggling to maintain lines of credit in the face of declining profitability.
Careful readers will want to make their own notes for follow-up. The book’s utility is somewhat hindered by an inadequate index, a disservice to a work that covers so much ground. On the other, hand, the bibliography is lengthy and while some of the bulk is devoted to providing sources for the ample fraud citations, there are many useful references to authoritative sources.
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[This article was posted on April 9, 2010, on the website of ABA
Banking Journal, www.ababj.com, and is copyright 2010 by the American