Exploiting the Dual

businessmeet1Many of today’s CFE’s hold dual certifications as CPA’s, CIA’s, CISA’s and a host of others.  This proven enhanced expertise endows the employers of fraud examiners engaged as full time corporate auditing staff with a whole host of new and exciting fraud detection and prevention capabilities.  This is especially true of corporations whose operations are daily fraud targets.  Rather than dealing with the infrequent single instance of fraud, as is most often the case in conventional CFE practice, these staff practitioners endow their employers with enhanced power in the task of devising investigative and preventative approaches to cope with random, most often automated, fraud attempts arriving on a recurring basis, twenty-four hours a day, 365 days a year.

One of the most effective innovations that dually certified CFE’s can bring to bear in such dynamic fraud environments involves some version of a mixture of continuous monitoring, continuous fraud auditing and continuous assurance. As the external and internal auditing professions view the first of these general concepts, continuous monitoring constitutes a feedback mechanism, primarily used by management, to ensure that systems operate and transactions are processed as prescribed. For example, as one of hundreds of possible examples, management might mandate that its staff CFE (s) periodically monitor the key fraud prevention controls that ensure that customer orders are checked against credit limits to ensure that the controls remain in place and aren’t deactivated.

Continuous auditing for fraud has been defined as the collection of evidence concerning fraud scenarios, by one or more examiners, on systems and transactions, on a continuous basis throughout a temporal period. For example, the staff examiners could routinely extract details of any unusually large adjusting journal entry for investigation, validate the reasons for the entry, determine whether it had been approved, and document these findings. The historical case file of irregularities will be built up from this and like evidence and from its related investigation, as will the examiner’s knowledge of the landscape of on-going fraud threats confronting the business.

Continuous fraud control assurance can even provide a concurrent or on demand assurance opinion on systems or transactions. A continuous opinion could represent an examiner’s or auditor’s opinion that overall fraud prevention controls are operating satisfactorily, unless a report is given to the contrary (often referred to as an ‘evergreen’ fraud control report). On-demand assessment concerning the functioning of key anti-fraud controls can be called for at any time to provide a spot evaluation at a point that does not necessarily coincide with a fiscal year or month-end. For example, a potential investor or lender might want to know the state of a company’s fraud prevention controls on the day that he/she makes a final investing or lending decision. Although these types of control assessments are still relatively rare, it’s possible that, given the pervasiveness of fraud in some heavily automated financial industries, the demand for this type of assessment may accelerate in the future.

Each of these three elements are built upon (and depend on) the one that precedes it. A continuous process of fraud assessment needs continuous monitoring systems to be in place to be effective. These monitoring systems provide the evidence to be collected and assessed upon which to build management assurance.

One of the biggest benefits of a program of continuous fraud control assessment is the beneficial effect it can have on an employing organization’s overall fraud control program. It’s obvious that, with continuous assessment, any key fraud control failures are detected and fixed as soon as they occur, bringing the effectiveness of the failed controls again more closely into conjunction with management’s expectations.  An additional plus for the continuous fraud control evaluation approach is that it provides early warning of problems; employing management can be apprised of a control failure as soon as it happens, providing maximum rectification time. Early warning reduces rectification downtime for the control. The objective is for the external auditors, when they later perform their checks, to find that the control weakness identified by the staff fraud examiner is now corrected and the corrected control operative as of the sign-off date, thus avoiding audit points.  One more advantage conferred by the presence of a dually certified fraud examiner on the audit staff is that many of the controls critical to the anti-fraud program can be fully automated under the CFE’s supervision and thus lend themselves to a continuous review approach. This proactive ‘no surprises’ approach to fraud control should be attractive to all organizations considering employing those holding the CFE certification as either staff auditors or security professionals.

What does it take for management to get this fraud prevention approach off the ground?  First, hire more dually certified CFE’s.  Next, automation is key to the program’s success, especially emphasizing data mining and analytics. Technology that can speed up communication is also needed, because there is no value in identifying an issue quickly if it is not communicated equally quickly to those who need to know about it. Continuous auditing for fraud includes continuous monitoring and reporting by exception on problems that arise. Therefore, the control environment of the employing organization must be at least good enough to ensure that the number of exceptions detected is not initially overwhelming. If anti-fraud controls are at a semi-mature level of effectiveness, however, there is really no reason why, with effort, a continuous assurance approach can’t work.

In setting up continuous audit tests, CFE’s must understand what can go wrong and know what they are looking for, in advance; this is a point where dual certification as an experience CPA or CIA is a plus in guiding the testing process and for creating the business rules for detecting exceptions and understanding them. This latter point is no trivial matter since something that could seem an exception under one set of circumstances, can be perfectly normal under a different set and trained financial assurance professionals know the difference.

Creatively employing their dually certified CFEs in an enhanced fraud detection and prevention effort based on the continuous audit approach confers several benefits to any management while enhancing the fraud prevention program:

–Creation of a database of the most frequently occurring fraud scenarios coupled with the most effective audit approaches to investigate and resolve them;

–Development of tailored data analytics and investigative tools for common fraud scenarios; auditors can get the fraud related data they need when they want them;

— Faster and more thorough fraud examinations and greater depth of audit for the same cost;

— Investigation and resolution of fraud related issues as they occur is a proven proactive approach demonstrating an enhanced level of management due diligence;

— The entire audit staff can have more alternatives in the way they perform fraud related work, including reliance on preventive controls like front end systems edits which prevent fraud be screening out transactions likely to contain fraud on the system’s front end.

–Because fraud related auditing is more effective it becomes more visible for those being audited both within and without the enterprise. Senior management has first-hand knowledge that auditors are ‘on the case’ even if they do not see them every day of the week. This visibility can also act as an additional deterrent to frauds, both internal and external.

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