Attestation Update – A&A for CPAs

Technical stuff for CPAs providing attestation services

How could an auditor pick up any red flags to this corruption case? Let’s change the circumstances

with 2 comments

Previous posts have given the background about a corruption indictment and my questions of what could have possibly been seen by a CPA auditor in this alleged situation.

Now let’s change the scenario.  If it is your client getting shaken down the implications on the audit aren’t that severe.  Just change the alleged situation to something different where the local business approached the mayor and asked him to intervene.  By changing that part of the story, it will convert this from an allegation of the mayor shaking down a business to a hypothetical of your client successfully bribing a public official.  That would make it an issue with a very material impact on your client and therefore a huge issue for you and your audit report.

Having changed those circumstances to where your client illegally paid off a government official, how could you possibly detect that bribery payment?

Just as mentioned earlier, paying money to some contractor in an effort to get your permit back could very easily be a legitimate expense.  It would take a lot of research (or wiretap power or subpoena power!) to identify the difference between a legitimate and illegal scheme.

As an aside, at one point in my career I looked at a fraudulent transaction.  Obviously no details will be provided about when this happened and the scenario will be exquisitely vague.  Let’s just say that senior management and the audit team looked at the transaction (how’s that for vague?) along with the supporting documentation for the transaction which was approved in accordance with company policy.  We could not see anything wrong with the documentation or the transaction by looking at it even though we knew that it was inappropriate. 

I will repeat my point – – knowing the transaction was a problem we could not see any clues there was a problem while looking at the transaction. 

Back to the situation at hand.

The only possible red flag I can imagine while auditing the hypothetical private company is that a construction company probably would not be the kind of organization retained to guide you through the permitting process.  On the other hand, that could still be a legitimate service offered by a legitimate construction company.  Do you as a CPA have enough familiarity with all the construction outfits in your area to be sure that no such capability exists?

I suppose if the payment was made in cash then that would be a major red flag.  On the other hand, one of my acquaintances that works in construction industry tells me that a lot of services in that industry are now cash-based.  Want a load of concrete or lumber?  Have cash ready when the supplies arrive.  No a/r billing.  Want to pay by check?  Sent it several days in advance of delivery so the check can clear.

However most likely the payment would be by check to a cutout.  If the payments were routed to a construction company (or a legal firm or a consulting outfit) to make it look legitimate so as to hide that the money was going to the elected official, was paid by routine check, and had a signed check request and contract attached to it, how would you know it was a bribe?  The most likely circumstance is the documentation would appear to be perfectly fine and appropriate.

So changing from the allegations as stated to a hypothetical situation in which the private company was initiating the bribe makes it even more difficult to tumble to the fact it is illegal.

Final post – so what?

Written by Jim Ulvog

March 14, 2011, 7:48 am at 7:48 am

Posted in Audits, Fraud

Tagged with ,

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  1. […] How could an auditor pick up any red flags to this corruption case? Let’s change the circumstances […]

  2. […] How could an auditor pick up any red flags to this corruption case? Let’s change the circumstanc… […]

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