Detecting Fraud in Organizations: Techniques, Tools, and Resources

Chapter Six

Understanding the Accounting Process

Accuracy is the twin brother of honesty; inaccuracy, of dishonesty.

—Nathaniel Hawthorne, writer

Property may be destroyed and money may lose its purchasing power; but character, health, knowledge and good judgment will always be in demand under all conditions.

—Roger Babson, business theorist and founder of Babson College

People present the greatest fraud risk within an organization. People are also often the most critical resources for maintaining a successful organization. Consider the forensic accounting equation called APE (assets minus people equals equity), which we introduced in an earlier chapter. It is important to recognize that people in the organization represent the greatest liability. You can use APE instead of the traditional accounting equation of assets minus liabilities equals equity. Think of where APE can be substituted in your normal accounting for debits and credits. Again, we have entered the world of the 800-pound friendly gorilla, as people create obligations within organizations. If these people are not monitored properly, it can severely impact the assets. Therefore, we need to examine the people who have the ability to incur these liabilities if we are to detect, deter, and prevent fraud while still maintaining the organization’s value. Find the right nonaccountant gatekeepers to place in the process in order to make sure the real number stories are being told. The ultimate goal is to create effective ...