By: William Bauder, CPA, CGMA, Manager of Assurance & Advisory Services
In a recent study, it was found that the typical organization loses 5% of revenues to fraud each year. These can be in the form of asset misappropriation, corruption, or financial statement fraud. It’s important to understand different types of fraud and how they might be impacting your organization.
When thinking of fraud, it is common to think of the first form, asset misappropriation. This would include theft of money, tools, products, supplies, etc. So what are the best tools to detect this type of fraud? It is my belief that most believe an independent audit by a CPA firm is the answer, with the thought that the scope and depth of an audit will uncover any issues they may have. However, I would argue in an asset misappropriation situation, a financial audit may not be the most appropriate tool.
It is estimated that only 3% of occupational frauds were detected by external audits, while 7% were discovered by accident. This statistic can be surprising, especially to those whom have been through a financial audit and have assisted external auditors in document requests which seem to go on for pages, and have had to answer questions which sometimes makes you feel as if you are on the hot seat in a court proceeding. This does not mean that an external CPA doesn’t have the right tools, knowledge, and abilities to help you uncover or detect a current fraud that may be occurring in your organization. Probably the best tool, and most underutilized, is the Agreed-Upon Procedure engagement.
This is a product nearly every CPA who can perform an audit, could perform for your organization. It’s quite simple, as an organization, you will sit down with your external CPA and discuss your area of concern. Maybe you are having a large number of inventory adjustments, maybe you think your amount of direct labor isn’t producing the correct amount of product, maybe you think your bank reconciliation has too many reconciling discrepancies. Whatever the concern is, your CPA can sit with you to develop tests specific to your concerns which will shed additional light on the situation. Once both parties agree on the procedures to be performed, the CPA will perform them and report back to you with the results, it’s quite simple. The benefit of an Agreed Upon Procedure engagement is that as an organization, you are in the driver’s seat to determine the exact procedures to be performed, you are able to set thresholds for variances, and you are able to see the exact results. While, in an audit, the majority of those decisions and work products are kept by the CPA and not shared with you.
An Agreed-Upon Procedure engagement is also independent from an audit, review, or compilation. If you already have internal or external requirements for one of these more traditional engagements, nothing is precluding you from having additional work done. In fact, bundling an Agreed-Upon Procedure engagement along with an audit, review, or compilation may be an easy add for your current CPA as they may be able to coordinate testing between the two engagements and may result in minimal additional fees.
If you have a gut feeling that something isn’t right in your organization, contact us today to discuss your situation and options.