The Standard-Times (San Angelo, Texas) reports that a former water district manager has pleaded guilty to a federal charge of theft for charging nearly US$63,000 worth of personal purchases to his public utility credit cards for about five years. A new auditor for the water district, after requesting credit card records from the former manager, uncovered the misuse of the district's credit card. The auditor's work ultimately led the fraudster to confess.
Although the former manager has sent a restitution check for the full amount to the district, he awaits sentencing from a federal judge overseeing the case. The man could be facing 10 years in prison and a US$250,000 fine.
Few would dispute the significance of fraud. According to the Association of Certified Fraud Examiners' 2012 Report to the Nations, survey participants estimate that the typical organization loses 5 percent of its revenues to fraud each year — a potential projected global fraud loss of more than US$3.5 trillion in 2011.
Several preconceptions about the role of audit in preventing and detecting fraud seem to underlie various statements in this case. Auditing is used to identify fraudulent transactions — not to figure out how they were created — but a good auditor can complement a fraud investigator's role in the interests of preventing and detecting fraud by being prepared to examine all of the records, processes, and practices and to go outside the ledger of accounts to find fraudulent transactions. This may include reviewing receipts from the company and customers. Any inconsistencies in these numbers could help uncover fraud. Auditors also could interview employees, customers, and clients, when necessary, to help determine whether fraud has taken place.
Although it's reassuring that an auditor uncovered this fraud, it is unfortunate that it wasn't detected until a new auditor was hired. Regular audits should be able to uncover fraudulent credit card use, and employees should be expected to justify their company credit card expenses by providing supporting documentation, such as bank statements and invoices.