Factors to Consider When Assessing Fraud Likelihood
Objectively, an auditor’s audit opinion should base on the appropriateness and sufficiency of audit evidence as supported by an in-depth evaluation of an audit report. An auditor should assess the likelihood of fraud by considering the following factors:
1. An auditor should carefully perform all analytical procedures for the overall review of the general audit process.
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2. The auditor should take into account all relevant evidence irrespective of the evidence’s contradiction or corroboration with an organization’s financial statements, and within the current financial reporting structure.
3. During the audit, the auditor should identify and accumulate all financial misstatements except those statements which are clearly trivial.
4. The auditor should not neglect an organization’s qualitative accounting practices regarding disclosures in the current financial statements, and amount of judgments as asserted by the company.
5. The effectiveness of NIC Inc. internal control against its financial reporting should base strictly on the analysis of the current evidence acquired from every source available.
Description of the Fraud Case
In 2016, the audit uncovered errors in financial statements reported over a period of six years leading to the loss $18 million at NCI Inc. Auditors traced the loss of $18 million to NCI Inc.’s controller. Financial statements revealed the controller embezzled $13million before 2016, and a further $5million in the fiscal ending 2016 (Mark, 2018). The company management blamed the ease of fraud to material weaknesses present in the internal control structure because the controller reported the missing as the company’s financial expenses over a period of five years before and during 2016.
Motivation to Fraud
The financial controller seized the opportunity to embezzle NCI Inc. because of the following motivational reasons. First, material weaknesses in the organization’s internal control framework were most significant motivational opportunity available to the controller. Material weaknesses in the internal control structure resulted from the cumulative effect of three other factors, including an unreliable internal audit team, a weak and insensitive board of directors, and the financial estimates which required NCI Inc. management’s subjective conclusions (Mark, 2018). Realistically, the reasons mentioned above collectively presented a rare opportunity for the controller to embezzle $18 in six years while reporting the figures as the company’s financial expenses.
Accounting Issues Related to Fraud at NCI Inc.
The company, NCI Inc. is an enterprise solution and service provider (not only an enterprise solutions provider but also a market leader) in the US. Accounting-related issues which led to fraud relates to contract acquisitions by the company, in whose hands the controller could manipulate the expense accounts. Therefore, the controller inflated allowable expenses for several contracts over a period of six years while managing the ledger postings to evade internal audit. Consequently, misstatements in the company’s financial reporting went undetected, especially for the expenses account, leading to repeated embezzlement five years before and in 2016. Furthermore, the financial controller was permitted by management to manipulate the company’s overhead expense accounts to reflect the exact expenditure. The inflated overhead accounts expense worked in favor of the controller because of the company’s material weakness in the internal control framework at NCI Inc.
Ineffective aspect of NCI Inc. Control Environment
The control environment leverages all components of an organization’s internal control because discipline, the tone in a company, and organizational structure depend on the effectiveness of current control environment. The management has the mandate to establish a controlled environment through policies, structures, standards, processes, and procedures vital to the determination of an organization’s internal control (Davies, Ramamoorti, & Krull, 2017). Therefore, integrity and ethics, competencies, management style and operating philosophy, the board of director’s course, and authority and accountability play an important role in an organization’s internal control environment effectiveness. Consequently, NCI Inc.’s audit department incompetency, the insensitive board of directors, lack awareness of authority and accountability resulted in a fraud case.
Ineffective Internal Control
A weak internal control framework in an organization is the reason many organizations face fraud cases. Vitally, internal control is a process designated by management to achieve specific objectives in an organization, and it must be affected by people. Compositionally, internal control integrates the control environment, risk assessment, monitoring and control of activities, and information and communication protocols of an organization (Davies, Ramamoorti, & Krull, 2017). Risk assessment, and control and monitoring of activities are the two internal controls that were responsible for the occurrence of the fraud at NCI Inc. First, cheating is a potential risk demanding any progressive organization to establish measures to prevent any appearance of fraud. Second, control and monitoring of activities were not sufficient because the controller realized such gaps and seized the opportunity.
The Pros and the Cons of Litigation
The NCI Inc. case represents fraud because of funds were stolen by an employee. First, prosecuting employees involved in a fraud case sends a warning to other potential fraudsters of dire consequences, leading to reduced fraud cases. Second, prosecution leads to sustained respect for the wronged organization in the marketplace. Furthermore, litigation would justify an organization’s commitment to ethical standards set by regulatory agencies. However, loss of valuable time and the high costs (in legal fees) is the main downside of prosecuting. Additionally, the full recovery of the stolen amount is not guaranteed. I would sue to maintain respect in the marketplace, to prevent reoccurrence of fraudulent cases, and to meet the ethical standards of regulatory agencies.
References
Davis, J. T., Ramamoorti, S., & Krull Jr, G. W. (2017). Understanding, Evaluating, and Monitoring Internal Control Systems: A Case and Spreadsheet Based Pedagogical Approach. AIS Educator Journal, 12(1), 59-68.
Mark, H. (2018). NCI controller accused of embezzling $18M over six years -- Washington Technology. Retrieved from https://washingtontechnology.com/articles/2017/01/23/nci-embezzlement.aspx
