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Calculator, glasses and a pen on a table. Transitions within an organization inherently create the potential for fraud.  Lindquist helps businesses protect themselves against fraud.

Transitions & Fraud–It's Not Just Internal

Transitions or changes within an organization, whether voluntary or otherwise, inherently create the potential for fraud. A transition can, in and of itself, be stressful or disruptive to any business, not-for-profit organization, or employee benefit plan—whether the transition is due to the exiting of an employee, officer or third-party service provider.

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While internal controls and fraud prevention/detection should be top-of-mind for individuals in charge of management or governance, a change in key areas of trust should always trigger a thorough review, even more so when a transition is sudden or under questionable/unusual circumstances.

It is obvious to everyone in an organization when an employee or officer leaves a position, because it’s internal. One day Sam is there, and the next he’s not. Even if it is under known circumstances or management sends out an email announcing transitions and wishing the departed the best, there are always those who are still a bit suspicious. So internally the circumstance presents itself as a trigger to question.

But what about externally?

Does management always know when there is trouble with those in positions of trust outside the company? If the same employee mentioned above was from an outside or third-party service provider, would every organization using that company be in the know as well? Possibly. Sure, the customers and clients who had direct contact with that employee would find out—and naturally ask why that person is no longer there—but what about all of the others who aren’t in that circle of awareness?

What if that person was let go because of fraud or theft of client-entrusted assets, resources or personal information? What if that led to an internal investigation at the service provider, and what if that led to the uncovering of widespread fraud, breaches or loss of client funds throughout? Well, one day you may find out, when you turn on the news and see the cliché guys in windbreakers carrying out boxes and boxes of documents as the authorities raid the place and put the tell-tale yellow tape across the doors!

So what is the takeaway, other than making you paranoid as most fraud articles do? It comes back to the simple fact that all of an organization’s valuables are not within the four walls of its offices. Someone is entrusted with the cash, the investments, the intellectual property, even the funds held in trust for the benefit of others. The awareness or reminder of this fact is primary. It is also important to review contracts as to whether the service provider maintains fidelity bond insurance coverage or additional protections and safeguards to ensure the safety of your property in the case of catastrophe. You may also request the provider’s Independent Service Auditor’s Report, which provides an opinion on the design and implementation of the system and controls design, implementation and effectiveness, as well as their annual independent audited financial statements to review the current financial status and if there is any question about their ability to continue as a going concern. And if it is after the fact or there are suspicions, that’s when the forensic accountants’ phones start ringing.

Author: Richard C. Gordon, CPA/ABV/CFF, CFE, CGMA, Director of Forensic and Valuation Services

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