Looking the other way

Managers' rationalization of possible frauds

By Cynthia Harrington, CFE, CFA

Managers, knowingly or unwittingly, may contribute to employees' frauds by rationalizing questionable situations. 

Bill Smith audited the far-flung plants of a large private corporation for the corporate headquarters. On one trip, he found multiple charge-offs that indicated some vendor contracts were little more than loans to favored dealers. The buck stopped before Smith could examine further. The local executives, auditor, and operations manager returned similar stories that the problem had been taken care of and any reporting would make the company look bad. Their actions kept the finding from making its way into the final report. (1) 

In a company fraud there are often two people involved even if only one is taking the money. Managers often look the other way because of their own sets of rationalizations. The fraud examiner who assesses the manager's role can find important clues to the nature and extent of employee fraud during an examination.

Sarbanes Oxley before and after
The ramped-up regulations and liabilities resulting from the Sarbanes Oxley Act changed the way public companies approach fraud prevention. Controls improved, education and monitoring methods tightened, and audit committees increased scrutiny of company processes. But the act has not put fraud examiners out of business. "Public companies are tremendously improved because of SOX, but I still see fraud perpetrated at private and not-for-profit companies," says Leon A. La Rosa, Jr., CFE, CPA, MST, chair of litigation support services, Gocial Gerstein, LLC, in Jenkintown, Penn. "I'm constantly surprised that nonpublic and even smaller public companies haven't taken up better prevention given all the limelight in the press about fraud."

Obviously, the new regulations haven't eliminated the problem even at public companies. Some people will always be looking for an angle to get a better path for themselves, sometimes at the expense of others. Ken Yormark, managing director of Protiviti, in New York, N.Y., reports the consensus belief that fraud will always be with us. "Controls are only as good as the people in place to monitor them," says Yormark. "Companies also change. The right control today might not be the right control for tomorrow."

Where gaps exist, managers - the monitors of both people and controls - often are the stopgaps. But their rationalization quirks can widely affect their job performances. SOX changed the regulations but the culture of fraud prevention is still in transition. Pre-SOX, many organizations unofficially encouraged a "don't ask, don't tell" type of culture. "The belief used to be 'if it ain't broke, don't fix it'," says Yormark.

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