Avoid Form Over Substance in Managing Risks

Fraud Prevention Tip #39: Avoid Form Over Substance in Managing Risks

I’ve been a professional auditor for almost 40 years. And I’ve seen it over and over and over again – hundreds if not thousands of times. Form over substance controls and behaviors targeting fraud risks.

Here’s what I mean:

• Two signatures are required on transactions over a threshold like $5,000. But neither signer knows what to look for. And each signs simply because the other did.

• Inventory policies require a wall-to-wall count at least once each year. Staff see several years of dust piling up on boxes along the back wall, but don’t bother asking, “What’s really in those boxes – if anything?”

• Managers approve monthly invoices from service providers, but never get out from behind their desk to find out if the service is being provided in accordance with agreements.

• Property housekeeping supervisors work from 9 to 5, and never show up unannounced in the middle of the night to observe when the work is actually being performed.

• Because it’s hot out on the docks, receiving personnel just initial bills of lading from trucking companies instead of counting the number of boxes received. They haven’t opened and inspected the contents of boxes in over a year.

• Managers are surprised when their month-end budget reports show unexplained spending, unknown vendors, and other variances. But they just assume ‘it’s probably OK’ and fail to double-check details.

• Payroll department supervisors see unusual patterns of overtime in two or three employees, but don’t take the time to verify that the reported hours are accurate.

• The assistant controller approves any journal entry placed on his desk for processing. He blindly trusts his staff to make sure that the entries are correct. And everybody in the department takes advantage of it.

• An executive knows one of her managers is extremely cozy with a key supplier and is living well beyond his means. But she shies away from determining if the source of the manager’s ‘income’ is actually a side-deal they have with the supplier.

• The New York based manager who oversees four company locations in Africa has never left the US to inspect these critical overseas operations.

Avoid form over substance. Insist on quality – especially in anti-fraud controls. Hold your people accountable for their signature and results. Refuse to be an easy target for wrongdoing and fraud.

John J. Hall, CPA

John J. Hall, CPA

John J. Hall, CPA, is an author, speaker and results expert who presents around the world at conventions, corporate meetings and association events. Throughout his 35-year career as a business consultant, corporate executive and professional speaker, John has helped organizations and individuals achieve measurable results. He inspires audience members in corporations, not-for-profit organizations and professional associations to step up, take action and “do what you can.”