Financial fraud continues to make headlines around the world—the recent Patisserie Valerie scandal in Europe comes straight to mind.
With modern technology, and seemingly loads of checks and balances in place, it’s fair to wonder how this type of fraud still takes place. Here are four examples of common fraud schemes designed to fool an auditor.
Client provides false information
With today’s technology, a dishonest client can easily manipulate or create a false statement and provide incorrect contact information. For years PFGBest, a commodity brokerage unit of Peregrine Financial Group, Inc., looked financially sound because the confirmation responses showed that the bank statements matched the firm’s financial statements. PFGBest CEO Russel Wasendorf concealed a multi-year $215 million fraud using a combination of Photoshop, Excel, scanners, and printers to make very convincing forgeries of nearly every document that came from the bank. He opened a post office box and put the address on the counterfeit bank statements. When the auditors mailed confirmation requests to the bank’s false address, he would intercept the request, type in the amount he needed to show, forge a bank officer’s signature, and mail it back to the auditor.
Client provides the contact name
When auditors do independently validate the address, phone and fax number or email for a financial institution, they often still do not validate an individual clerk within the confirming entity. Typically confirmation fraud involves collusion, where the company being audited requests certain individuals within the bank to either provide false information in the audit confirmation response or to leave off information that would be material to the financial statement audit. Olympus Corporation’s accounting scandal hid $1.7 billion in investment losses from investors over a 13-year period due to executives arranging for foreign banks to only provide the balance amount while intentionally not providing material information to their auditors.
Client influences the confirmation process
With a little effort, a dishonest client can create third-party credentials that closely resemble legitimate credentials. For example, an inexpensive fake website, displayed as if it were for a legitimate financial institution, can be quickly created to provide illegitimate contact information. This appears to be one of the techniques employed by China-Biotics, Inc. (CHBT), which directed their auditors to a fake bank website to deceive the auditors with false audit confirmations and online verifications.
Signature verification is impracticable
Given all the possible loopholes to circumvent the paper confirmation process, it’s not practical to think an auditor has the resources to validate the signature of the person responding to a confirmation request. Fraudsters know that the effort required to validate the signature of the confirming entity is rarely used proactively to prevent fraud. With this in mind, fraudsters falsely responding to a confirmation request simply scribble the signature of anyone, to include the signature of a legitimate signatory, to effectively validate a paper confirmation response.
Confirmation’s secure, digital platform helps eliminate fraud associated with the confirmation process. All parties are validated, and the auditor retains control of the process from start to finish. Visit Confirmation at Accountex, Stand 865, to learn more.