Jyhjing “Victoria” Harrington, accounting manager for law firm Dewey & LeBoeuf, recently testified (subscription required) that she made—and instructed others to make—fake accounting entries in the law firm’s accounting records to distort the firm’s true financial condition (the law firm declared bankruptcy in May 2012). In addition, she said she lied to outside auditors to cover up the fraud.
Harrington pleaded guilty to a first-degree charge of a scheme to commit fraud; she could face up to four years in prison. She reportedly is cooperating with prosecutors.
The 2014 Report to the Nations on Occupational and Fraud Abuse states that external audits are implemented by a large number of organizations but are among the least effective methods for combatting occupational fraud. External audits were the primary detection method in just 3 percent of fraud cases reported, compared to 7 percent of cases detected by accident. In addition, the reduction of fraud losses was among the smallest of all of the antifraud controls analyzed in the study. In other words, external audits should not be relied on as an organization’s primary antifraud mechanism.
In addition, the Report to the Nations indicates many of the most effective antifraud controls are overlooked by most organizations. Proactive data monitoring and analysis was only used by 35 percent of the victim organizations in the study, but the presence of this control correlated with frauds that were 60 percent less costly and 50 percent shorter in duration. Other less common controls, such as surprise audits, a dedicated fraud department or team and formal fraud risk assessments, led to similar reductions in one or both of these measures of fraud damage.
When determining how to invest antifraud dollars, management should consider the observed effectiveness of specific controls and how they will enhance potential fraudsters’ perception of detection.