Larry’s laws of Larceny- Law 2: The Auditor Can’t Find What Isn’t on the Books

Larry Beebe, CPA

I often read stories in the newspaper about funds being stolen or misused. Often there is an outcry from the newspapers or a politician stating, “Why didn’t the auditors catch the fraud?” Sometimes the answer to the question is the auditor has no way of detecting the fraud because the fraudulent transactions were not on the books.

A large pension plan hired a new investment manager. In order to get the account the investment manager hired a relative of one of the executives of the plan’s sponsors. The relative of the sponsor’s executive did little or no work for the amounts he way paid by the investment manager. There was no way for the auditor to discover the problem because there were no transactions on the plan’s accounting records.

Trustees will often do no better than auditors in finding transaction that are not in the accounting records. What they can do is to have all trustees, employees, and plan vendors sign annual conflict of interest statements. The dishonest individual signs the statement, but in doing so, commits a second fraud. Another individual signing the conflict of interest statement may reveal something in their answer that leads to the apprehension of the thief.


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