Detecting the rapidly rising number of small scale fraud cases

Posted by PHOON Pei Jing, Year 3 undergrad at the School of Economics, Singapore Management University

With the enforcement of the Sarbanes-Oxley Act, standards at big companies have generally improved over the past decade or so, with more effective internal controls over their financial reporting. In addition, “Accounting Quality Model”, a computer program that number-crunches reams of companies’ financial statements looking for outliers and other red flags to facilitate fraud detection have also been extensively revised. Stringent enforcement, together with streamlined process of fraud detection has helped to create an anti-fraud environment.Nonetheless, with all that’s being done, the number of fraud cases has raised with future numbers expected to rise higher still. These questions whether the current preventive and mitigation measures put in place have been effective in reducing and deterring fraud incidents at all. This is coupled with an increasing level of difficulty in detecting fraud, as mentioned by Michael Maloney, chief accountant in the SEC’s enforcement division. Perhaps, this is due to the smaller scale nature of the new fraud cases, and the less severe nature of them relative to the early 200s. This only means that the increased number of fraud cases will go undetected, and in the case that they do eventually be identified (as supported by Michael Maloney “we do get there”), the extent of the fraud may have grown so big such that other companies may be impacted.

Perhaps then, detection tools such as Benford’s law that is known as simple and effective tools would no longer be useful and relevant in detecting the very rapid increase and increasingly difficult to detect fraud cases. More emphasis should perhaps be placed on tools such as forensic accounting, to continue to adapt to changes across time and include more types of financial information scrutiny. The steps towards streamlining fraud detection process such as the “Accounting Quality Model” mentioned in WSJ could also pave the way and shed light in the development of more effective and efficient way of detecting fraud, to discourage such unhealthy practices.

For more information on the risk model – The Accounting Quality Model, please refer to this link: http://www.sec.gov/News/Speech/Detail/Speech/1365171491988#.VOI9mF4xGlI

http://www.wsj.com/articles/sec-gets-busy-with-accounting-investigations-1421797895

http://faculty.usfsp.edu/gkearns/Articles_Fraud/Benford%20Analysis%20Article.pdf

http://www.hrmars.com/admin/pics/1671.pdf