not checked, fraudsters may easily slip rate set of facts before making employ- clear picture of the financial impact of
through the hiring process. ment decisions. any fraud scheme. Various analytical
Before hiring a new employee, orga- Auditors can be of great assistance review techniques that could be used
nizations should review the candidate’s with regard to background checks and include trend (horizontal) analysis; ratio
resume carefully and verify stated infor- other employee investigations. As (vertical) analysis, or common size state-mation. The organization should not explained in “The Fair Credit Reporting ments; budgetary comparisons; compar-rely on telephone numbers listed for Act” on page 61, organizations can ensure isons with industry averages; and review
prior employers, as they may be false. compliance with U.S. legal requirements of general ledger and journal entries. Any
Instead, employer phone numbers by employing the investigative services unusual items found should be pursued
should be obtained independently. of internal auditors instead of hiring an to determine whether fraud could be the
In addition, professional credentials cause of the aberration. should be checked and academic degrees confirmed. PERFORM CONTRACT REVIEWS Employers should also consider per- Review of company contracts and agree- forming a second reference check six ments can help identify possible contract months after an employee begins work- fraud, including kickbacks, bribery, or ing for the organization. The reason for conflicts of interest among the organi- an employee’s dismissal from a recent2outside party. INCREASE THE USE OF ANALYTICAL REVIEW Fraud can affect financial statement rends and ratios, and accounts that are manipulated to conceal fraud may man- ifest unusual relationships with other3zation’s employees. Contract fraud can
job may not have had time to become accounts that have not been manipulated. occur when a trade supplier fraudulently
part of his or her record during the ini- Moreover, fraudsters may engage only takes advantage of a contract to make
tial search. sporadically in fraudulent activity, cre- illegal profits. It may also involve a
Lastly, employers should conduct a ating erratic patterns in periodic account conspiracy between entity personnel
criminal background check on prospec- balances. By conducting financial analy- and a trade supplier or between two or
tive employees that identifies any sis, internal auditors may reveal unex- more vendors.
known criminal activity or other pected relationships or the absence of Auditors can investigate for contract
offenses perpetrated. Any information relationships that should be present. fraud by looking for unusual patterns
gleaned from the search allows the Auditors should consider analyzing within records of contracting activity.
employer to ask direct questions of the several years of financial statement data, One potential sign of fraud, for exam-candidate and obtain a complete, accu- using different techniques to obtain a ple, would be a contractor that routinely
bids last, bids lowest, or obtains the contract award. Contracts can also be
reviewed for evidence of suppliers regularly receiving contracts without a legitimate reason — the review may reveal
that bribes or kickbacks are motivating
the awards. In addition, a review of public records may reveal whether an
employee has a covert ownership inter-
4est in a contractor.
CONDUCT AN ECONOMIC
ESPIONAGE THREAT ANALYSIS
To protect sensitive information, organizations should perform an analysis that
gauges threats to intellectual assets. The
analysis should include an assessment of
what assets are owned and how they could
be misappropriated. For entities involved
in e-commerce, service, or technology-oriented fields, the threat analysis should
also include an evaluation of exposure to
economic espionage, which involves the
theft, misuse, or abuse of trade secrets and
confidential business information (
The U.S. Uniform Trade Secrets
Act defines a trade secret as “
information, including a formula, pattern, compilation, program, device, method,
Categories of Fraud
‡Hacking and other cyber-theft.
‡Automated teller machine theft.
‡Credit card fraud.
‡Fraudulent classification of
‡Fraudulent merchandise returns.
‡Expense account abuse.
‡Theft or misappropriation
FINANCIAL REPORTING FRAUD
‡Concealed liabilities and expenses.
‡Improper revenue recognition.
‡Inappropriate omissions or
‡Medical/insurance claims fraud.
‡Workers’ compensation fraud.
‡Conflicts of interest.
VENDOR-RELATED AND OTHER
THIRD-PART Y FRAUD
‡Bid rigging and price fixing.
‡Diversion of sales.
‡False invoices and
‡Kickbacks and conflicts of interest.
‡Theft of intellectual property.
SOURCE: KPMG’s Fraud Survey 2003.
INTERNAL AUDITOR APRIL 2005