An important point to keep in mind concerning sequentially numbered documents is that they don’t deter fraud and error by themselves. Their only value is to bring anomalies to the attention of management. If no one looks regularly for missing items in the sequence and, more important, if no one follows up and resolves the missing items, then there’s no reason to number the documents. As with horizontal and vertical analyses, gaps tell us only that something is out of the ordinary, not the cause.
Reconciliations
Most of us are familiar with bank reconciliations. This is a procedure in which we take into account differences between our recorded cash ac- count and that of the bank. It reflects deposits and withdrawals that have been made but that have not been recorded in the bank statement.
The bank reconciliation is a specific case of identifying and analyzing gaps and anomalies in sequentially numbered documents. In this case, the checks are prenumbered, and we compare our records to those of the bank. Bank reconciliations have the advantage of being independently prepared statements with which to compare our own records, but recon- ciliations need not be limited to cash. Reconciliations are a structured technique for examining the disposition of any sequentially numbered documents. We list the documents in order, uncover any with missing or inadequate information, and factor in the effects of any outstanding doc- uments for which we have no final disposition.
If we examine the same record of POs that we saw in table 6.6, we can calculate a more accurate picture of the office expenses for June than if we used only the checkbook. In this case, the outstanding PO (1204) represents an obligation to pay, so the true expense for June is $1,609.00 (all of the paid POs, plus the outstanding one) rather than the $1,009.00 that we get from the check register. A reconciliation also reveals the PO with no information, just as a blank entry would in the check register.
Again, there’s no indication concerning why the information is missing, only that we need to follow it up.
medical analogy flowing a bit longer, it’s like finding something during a self-examination; it should tell you to get to a physician, not perform sur- gery on yourself.
If you do find something out of the ordinary, and it’s anything but the most basic of frauds, I would strongly advise you to bring in a pro- fessional to conduct the investigation. You don’t want to run the risk of missing something or poisoning the evidence and destroying your case.
(See chapter 7 for a more detailed discussion of what to do if you find something.)
Finally, proactive fraud examination is a complement to good in- ternal controls, not a replacement. Any examination is predicated on having reliable and timely financial records, and it’s still less traumatic and more cost effective to prevent fraud than to detect it.
116 UNCOVERINGFRAUD
EVEN IN THE BEST OF LIBRARIES . . .
One of the things you’ve probably picked up if you’ve read this far is that there is no such thing as a completely foolproof antifraud program. It doesn’t make economic sense to spend more protecting your assets than they’re worth, and frankly, there will always be weaknesses that can be exploited even if you had all the money in the world to spend.
Before we proceed any farther, however, let me disabuse you of the thought that this fact lets a library off the hook as far as instituting good internal controls. It doesn’t. I have heard countless times over the years that “if a crook wants to steal something, he or she will.” I suppose that’s theoretically true, but you’ll notice, for example, that muggers don’t stand outside military bases trying to rob Navy SEALS or Army Green Berets as they leave. Similarly, criminals rob convenience stores more fre- quently than they rob armored trucks.
Most criminals are rational about their work. They look for easy, cost-effective targets rather than dangerous ones that require more work and carry a greater risk of capture or injury or both. If the target appears to be difficult to tackle, they look for an easier one. Therefore, even though a financial system can be defeated in theory, if doing so requires more work and risk, that system tends to be left alone. Hence, a moder- ately effective system is still a better investment than no system.
Of course, there’s still a distinct, if reduced, possibility that your li- brary can become the victim of fraud no matter what you do. In the spirit of anticipating problems rather than ignoring them, this chapter is devoted to helping you get through a fraud if the worst actually occurs. Be realistic
117
7
If Fraud Happens:
Dealing with the Fallout
about what you can do yourself. Some frauds are easy to uncover be- cause no one in the library was paying attention. That doesn’t mean all fraud schemes are simple. Nor does it mean that your initial discovery will uncover the full monetary extent of the damage. At some point you are likely to need the services of a professional.