Pay attention to auditing and fraud news and trends to reduce the financial risk to your firm. All financial accounting firms provide auditing services. The purpose of an audit is to test the controls in place and uncover any suspicious transactions that could be the result of accounting fraud.

The techniques and methods used to commit and detect fraud change constantly. Staying informed on fraud methods used by others results in improved internal controls and reduced risk. Follow the three steps below to stay informed on trends in auditing and fraud.

1. Subscribe to auditing services newsletters.

2. Investigate auditing and fraud industry reports.

3. Maintain information on fraud auditing and detection.

Action Steps
The best contacts and resources to help you get it done

Read auditing services publications

Sign up for the regular publications provided to auditing services. These monthly and quarterly newsletters include valuable information on trends, risks and current litigation. Fraud auditing and detection is a complex field with many changes in legislation and high profile cases. Stay up to date to reduce your risk.

I recommend: Work with your accounting services firm to stay current on business fraud prevention techniques. Follow news stories on fraud detection services and decide if your firm requires one. Register for Audit Serve or review the publications available from The Institute of Internal Auditors. The most effective way to reduce your risk is to institute business procedures that increase the likelihood of being caught and letting all the staff know.

Review auditing and fraud research

Spend time to review the results of fraud auditing research. This is a very large industry, with a large number of accounting professional specializing in fraud auditing and detection. Keep up to date on the level of activity in this field and discuss these trends with your accounting or auditing firm.

I recommend: There are a wide range of fraud auditing tools available. The business audit is a standard process covered in any professional accounting engagement. Fraud magazine is published by the Association of Certified Fraud Examiners, the leading professional group in fraud education for business. Inbox Robot will keep you current and informed on auditing and fraud developments.

Stay current with fraud reports

Write down a list of contacts in law enforcement responsible for conducting an auditing and fraud investigation. Although accounting firms providing auditing services and can give advice on fraud prevention, the actual prosecution and investigation is normally managed by a law enforcement agency.

I recommend: The increased use of fraud management software has resulted in more investigations and arrests for accounting fraud. Read the information provided on the FBI website on a regular basis. Subscribe to the newsletters and articles collected by the National White Collar Crime Center to stay vigilant.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Fraud auditing and detection is essential in any business. The problem is not the quality of the staff you have hired, but the types of controls in place to reduce the chance of accounting fraud.

The facts on fraud are frightening. Economic crime – or "asset misappropriation" in CPA-speak – poses a growing threat. A PricewaterhouseCoopers study estimates that nearly half of all businesses will be victimized in the next two years. And no company or industry is immune. The Association of Certified Fraud Examiners (ACFE), a leading provider of anti-fraud training and education for business, says small business owners have every reason to worry: Per-employee losses from fraud in the smallest businesses are 100 times greater than those at their larger counterparts. Yikes! And many small business owners may have a false sense of security. While businesses are reporting a higher number of incidents, most fraud is detected by accident. These factors can make your business a fraud victim:

1. Inadequate pre-screening of employees. Small businesses do background checks on potential hires less often than big companies. Would-be thieves know this and gravitate toward smaller companies. About seven percent of employees have a history of workplace theft and fraud.
2. Limited internal controls. Small firms that are victimized usually lack the manpower to implement effective controls. Internal controls of some type are critical for a small business.
3. Too much trust. Sadly, the very thing that makes a small business a pleasant place to work also enables thieves within it to succeed.

Business.com's "What Works for Business" blog is a great way to keep up with the latest solutions, trends and strategies for small and medium business — including a full range of other security issues.

Action Steps
The best contacts and resources to help you get it done

Give yourself a fraud prevention checkup

How vulnerable is your business to fraud? Are your current controls adequate to prevent it? Find the answers with a self-diagnostic.

I recommend: The Association of Certified Fraud Examiners (ACFE) has a terrific Fraud Prevention Checkup that you can download free. It's a simple but powerful test of your company's fraud health. You can also order a Fraud Prevention CD-ROM that has the Checkup along with other fraud prevention resources.

Bring in professional fraud prevention help

Strong fraud prevention measures can help bolster confidence in your business among investors, lenders and outside directors.

I recommend: ACFE can help you locate an expert to help with fraud detection and prevention. Their Fraud Resource Center lets you search for an examiner in your industry and area. The Fraud Examination Tools include a fraud prevention checklist, case summaries and sample documents.

Offer employees a way to anonymously report abuses

Employees often know what goes on in a store, office or warehouse. Give them a way to report their concerns...

I recommend: Loss Prevention Specialists offers a service called ResponseLine which allows employees to anonymously report any business abuses 24/7 via a toll-free number.

Develop a loss prevention program

Avoiding losses starts with recognizing the risks and putting basic preventive measures in place.

I recommend: Get prevention ideas, tools, consulting help and protection from Loss Prevention Specialists and the Association of Certified Fraud Examiners.

Try to recover your losses

Civil Recovery laws in 49 states and the District of Columbia allow businesses to recoup losses due to theft. These laws let you to pass costs due to theft and security onto the offenders rather than your honest customers.

I recommend: Get details on Civil Recovery and how to use it.

Conduct pre-employment testing

Pre-employment tests can help you do a better job of hiring. There are great, affordable products that let you conduct the testing yourself.

I recommend: G.Neil has specialized in providing small businesses with human resources solutions for many years.Their employment testing products and services offer affordable solutions for small business. Test for retails skills, clerical skills, reliability, supervisory potential and many other skill sets. Buy the materials or test online. ExpertRating and Hire Success also have affordable testing solutions.

Hear from an authority on forgery, embezzlement and fraud

Frank Abagnale, who's been associated with the FBI for over 30 years, is one of America's top experts on business fraud prevention. He conducts seminars, does consulting work and has written books and has other resources available on his Web site.

I recommend: Abagnale has also done free seminars for Office Depot on how to protect your business from fraud.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  The key to fraud prevention is dividing responsibilities among employees. To prevent and detect fraud, rotate employee assignments. Team different employees together or with you.
• •  In the cash realm, skimming involves a crooked worker stealing money from the business before it is received and recorded.
• •  The most harmful schemes usually involve fraudulent payments from your business bank account. For example, an employee might submit a false invoice, which your business unknowingly pays, to the benefit of the thief.
• •  In the non-cash area, crooked employees usually opt to pilfer items they can put to personal use, such as clothing, jewelry, groceries, electronics, office equipment and supplies.
• •  If you provide credit to customers, beware of a type of fraud called the 'bust out.' Unscrupulous customers might buy large amounts of merchandise quickly, running up big bills they never intend to pay. Some start by ordering small amounts and paying on time to establish good credit. Once established, they go for the bust-out.
• •  Take physical inventory regularly and check daily receipts against lists of items sold. Secure inventory and supplies.
• •  Hire a CPA to examine your books.

Invest time to learn about auditing and fraud basics. The risk of fraud is part of any business venture. The only truly effective way to reduce this risk is to implement procedures that increase transparency and accountability. Document your current business workflow to identify areas of risk and review with an accounting professional.

Effective fraud prevention utilizes software, expertise and the latest data to reduce business risk and losses. Follow the three steps below to improve your understanding of auditing and fraud basics.

1. Review auditing and fraud information.

2. Identify fraud prevention resources.

3. Investigate fraud auditing and detection software.

Action Steps
The best contacts and resources to help you get it done

Read auditing and fraud publications

Collect several books on fraud auditing and detection to develop a deep understanding of the root cause and risk factors for accounting fraud. Review the auditing services included in your accounting services firm contract to ensure sufficient time is dedicate to auditing and fraud detection. Confirm the firm selected has sufficient experience to manage this properly.

I recommend: Purchase Fraud 101: Techniques and Strategies for Detection ebook. This book provides an action plan, tips and techniques to assist in the identification of fraud. Hire Prof. Epstein from Russell Novak & Company to speak to your firm about white collar crime and how to reduce it.

Locate fraud prevention professionals

Identify fraud investigation firms that can be contacted on short notice to launch a business fraud investigation. Combine auditing services and fraud prevention to assist in time management. Check the credentials of any fraud prevention firm to ensure they are certified fraud examiners.

I recommend: Obtain a list of certified fraud examiners in your area from the ACFE. Check references and discuss desired outcomes before hiring the firm. Many firms, such as SD McDuff offer seminars and courses on fraud detection and protection.

Install fraud auditing and detection software

Reduce the risk of loss through accounting fraud by installing a auditing and fraud detection software program. These programs are specially designed to perform the basic data gathering and analysis tasks required in fraud auditing. There are many creative ways to defraud a company and the best way to reduce the risk is to put a good detection system in place.

I recommend: Specialist who focuses on auditing fraud are well versed in the use of fraud auditing tools. Request a free demo of Caseware, a commonly used fraud detection software. Contact ACI Worldwide for detailed information on the installation and use of risk reduction tools.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Accounting professionals know that effective fraud prevention measures are the only way to reduce accounting fraud. There is no way to reduce the temptation, but only to put systems in place to catch the fraud faster and reduce the loss.

All companies should be aware of fraud and how it can affect their bottom line. Companies that take a proactive approach to potential accounting fraud will find they can relax and be assured their company is protected. Learning the basics when it comes to auditing and fraud starts with a few key terms like misappropriate and improprieties, but there are a few other terms you'll need to understand to know where you may encounter the possibility of fraud in your organization.

Action Steps
The best contacts and resources to help you get it done

Misappropriate

Misappropriate means to be dishonest with appropriations to benefit one's self. This can include embezzling or lying about funding in a way that benefits yourself.

I recommend: Visit the Accounting Institute Seminars glossary of terms to review the definition of misappropriate.

Management, employee or external fraud

When it comes to fraud, there are three main categories: management, employee and external. Described by their names, management fraud is conducted by top-ranking managerial officials; employee fraud takes place when an employee, not in a supervisory role, improperly handles a company's money; and external fraud is a theft of business resources by someone not associated with the company.

I recommend: The American Institute of Certified Public Accountants provides a definition and comparison of the three types of fraud.

Certified fraud examiner (CFE)

A certified fraud examiner, or CFE, is trained to detect many accounting-type crimes. The CFE reviews accounting and auditing records, takes statements and conducts other research to determine whether a crime has occurred.

I recommend: To learn more, visit the Association of Certified Fraud Examiners.

Brokerage fraud

Brokerage fraud refers to a stockbroker or firm giving investors advice that may be biased or inaccurate, so that the broker or firm can benefit from the potential investment.

I recommend: Read about brokerage fraud at the Lawyer Shop.

Improprieties

Improprieties refer to basic acts that are intended to deceive someone else and cause financial distress. Examples include bribery, theft and breach of contract.

I recommend: The University of Toronto Internal Audit Department explains improprieties.

Whistle-blower

A whistle-blower is an employee or other individual with knowledge of a company's misappropriations. Legislation like the Sarbane-Oxley Act of 2002 protects anyone with information from being wrongly punished by a company or manager involved in the misappropriation.

I recommend: Learn more about protection for whistle-blowers at Katz, Marshall & Banks.