Elephant In The Room

Sub-Material Fraud Risk

By Jeffrey T. Hare, CPA, CISA, CIA


2009-MarchApril-Elephant in the Room-Sub-material Fraud Risk 

Ivan was an excellent accounts payable clerk for Bacme Corporation. Management trusted him implicitly. Ivan entered new suppliers into the system and subsequently entered invoices related to these same suppliers. Big mistake; Ivan had been using that freedom to create several new fictitious suppliers and to write checks worth thousands of dollars to himself. A tenacious external auditor finally found the fraud.

How did Ivan get away with his crimes? The primary mitigating control over his access, designed by a Big 4 firm, was a review of a final payment register that included supporting documentation for all checks totaling more than $30,000. Ivan knew about this control, so he never wrote a check to himself exceeding that amount. This control prevented material misstatements in the financial statements, but it left the company exposed to supposed immaterial fraud. Maybe it was technically immaterial, but these were substantial losses.

This case is fictitious, but the factors that led to it are very real.


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