Calvetti Ferguson

Automated Controls

Improving Automated Controls to Detect Fraud

Automated controls are intended to make life easier — often in the pursuit of more efficient, paperless systems, or better security and reduced human error.

While automated controls vary in terms of their sophistication (from a simple password to process controls within a system), at their best they take mundane, routine controls out of the hands of employees to allow them to do more meaningful, thought process work.

However, although automated controls enable efficiency and can handle data at a larger rate than human controls, they do present some risk. The most significant weakness is improper control design. For example, a control might check for a vendor’s presence in the system, but may not check whether a vendor is authorized to provide a given product. Outdated controls present another risk. Employees with high-level access may leave a company, but if their profile still exists, it can be used inappropriately. Controls should be reviewed and tested after any major change in the control feature (such as employee authority), and at a minimum on an annual basis as best practice. Finally, automated controls tend to make employees complacent, and self-checks fall by the wayside.

In a worst-case scenario, automated controls present opportunities for fraud. Corporate fraud most commonly occurs internally, when fraudsters take advantage of complacency in those who oversee the controls. Problems most typically occur when overseers rely solely on automated controls and the historical data they provide, but conduct no further review of the controls or the data they gather, essentially removing the human element from the process.

This example highlights the dangers of removing human oversight from automated systems. A company with more than 1,000 employees implemented an employee purchasing system in which each employee was given a Visa card tied directly to the company’s bank. Employees would log in to a secure website and code each expense. The employee’s manager would then approve the expenses, which would then be posted to the general ledger.

The weakness in this case was that many employees were approving their own expense reports, because manager passwords were not secured. A group of fraudulent employees managed to embezzle thousands of dollars before being caught, and were only caught because they were overheard boasting about their theft. In this case, a simple process for tracking unusual changes in spending trends could have prevented this loss. For example, a report that compares current purchases to historical purchases for the past three to six months would have shown the trend. Or, a report that shows all purchases for a specific type of vendor name word inclusions (such as the word spa) or type of item purchased (such as electronics) would also indicate abnormal activity. Even a simple report showing purchases from restricted vendor types, such as spas or electronics stores, could be used to identify potentially fraudulent activity.

To prevent future incidents, the company implemented a series of human controls that, when coupled with the automated controls, provided an ideal balance of greater efficiency and checks and balances. Each of the steps below ensures that manual, repeatable controls are incorporated into the control automation process:

  • Don’t review everything, review for exceptions
    Creating a schedule to review for exceptions limits the time typically required to review a large volume of data. In the case study mentioned above, the company established a schedule that reported purchases over five percent from the prior 12-month period average for a given employee. From this schedule, the company is able to look further into specific employee expense reports. The employee’s typical expenses are also taken into consideration — for example, does the employee typically purchase fuel or airline tickets? Any anomalies are discussed with the supervisor or employee further to eliminate possibilities for fraud.
  • Look at trends and investigate significant variances
    That same logic can be applied to trend analysis. The company established a base line of regular purchase categories and spending trends by month. When there is a change of a certain category, that expense is investigated. This investigation involves examining data from prior expense reports and justifying the current expense. When unusual trends are identified (such as airline tickets for an employee that doesn’t typically travel), the supervisor is questioned regarding the expense.
  • Rotate what is reviewed 
    This company instituted a rotating review process to alternate a sample of 10 expense reports by department. Reports are reviewed in detail for key items like original receipts. Supporting schedules are compared for validity and missing data. Sample-testing allows for high efficiency and provides a reasonable level of checks and balances on the company’s automated controls.
  • Eliminate holding accounts
    Holding accounts offer few benefits, instead just tempting employees to place amounts in “unknown” categories. The company in the example above had over $14 million placed in “other expenses” over a two-year time period. The balance in the holding accounts skewed the trend analysis performed on the accounts in which the expenses actually belonged, which could have a serious impact on management’s decision making process. Eliminating this category allows trend analysis by category to be more accurate, and helps prevent bad information from being incorporated into the company’s financials.
  • It is also good practice to periodically re-examine the types of accounts being used, to either create new accounts or give guidance on what is appropriate to allocate to each account. Consistency is the key to having good data in the accounts.

The measures detailed above will improve the overall control environment, reduce over-reliance on automated controls by putting the human factor back in the process and lessen opportunities for fraud.

Manish Seth, CPA, CFE and MPA, is a Senior Manager with Houston-based Calvetti, Ferguson & Wagner, a full-service CPA firm focused on the energy and multi-national sectors. Its partners represent a variety of industry experience: veterans of Big 4 and mid-tier public accounting firms, as well as CFOs, Controllers and other executive levels. For more information, visit