Many years ago the since-retired head of a politically-oriented organization called me asking for advice about an auditor. An employee of theirs had stolen tens of thousands of dollars from them over a period of years, and their auditor never caught it so they felt it was time for a change. The man asked me about the auditor I was using, and if I knew who they voted for? I had no idea, I told him, and maybe the problem here is that you see an auditor’s ballot choice as a key qualification.
Accounting standards in the U.S. are far better than they are in much of the world. I’d hate to peer under the hood of a Chinese company like HNA Group or Anbang Insurance. Yet I’m also skeptical of the financial pronouncements that many companies make. When Jack Welch ran GE, the company would beat earnings estimates by a penny or two every. single. quarter. GE Capital, the financial arm generating around half the company’s revenue, was something of an accounting black box that pulled rabbits out of hats like that. Auditors usually disclaim liability for the contents of their audits, saying they’re just relying on what a company’s management tells them.
Understanding a business relies on the culture of the company, and protecting against fraud relies on financial controls (which a good auditor tests rigorously). Ultimately there may be signs that something is amiss but those usually seem apparent afterward. I was shocked 17 years ago when a well-known frequent flyer and moderator at FlyerTalk.com turned out to be an accounting sham.
My point in sharing this is that it doesn’t surprise me at all that Spirit Airlines says they were conned out of about a million dollars by two employees and a vendor working in cahoots. According to the airline,
- The vendor would charge up to 20 times the market price for a part
- The purchases were made by two employees
- The vendor would then kick back part of the overcharge to the employees
Specific details about Janjua’s business dealings with the airline Spirit were unclear from the court filings, but, according to the complaint, Janjua had created three companies in Florida – Airtran Industrie, Allstar Aviation, and Aero Parts Company – which had contracts with Spirit.
The airline alleged in its complaint that it overpaid about $857,139 for parts over several years.
Those contracts were awarded by a pair of Spirit employees who met Janjua at a trade show in about 2015, the airline said.
Remember those signs that should have been obvious? A Florida-based airline supplier called “Airtran Industrie,” really?
Blatant fraud and kickbacks go on all over, the question is where and how much? And what about more subtle forms of influence, such as vendors who pay for lavish dinners or that give nice gifts at the holidays? These aren’t explicit quid pro quo offerings, but they’re done precisely because the bet is they’ll influence an employee to make a decision they wouldn’t otherwise make.
Impressive! The accounting 101 course I took focused on the basics of double bookkeeping for managers… and how hard fraud is to pull off when it requires a conspiracy. It happens, but the more folks involved, the more likely someone is to slip up. Fraud most commonly occurs when a single employee has no meaningful oversight.
So when somebody actually manages to conspire and get away with it for any reasonable length of time, it’s pretty impressive! Enjoy jail, fellas!
Auditors are not there to prevent fraud. They ensure that the company books are accurate, and that companies are following best practices designed to prevent fraud. It is management’s responsibility to prevent fraud. If management is perpetrating the fraud, an auditor will be hard pressed to find it. Typical practices are to approve a vendor to be sure they exist before allowing purchases to them, as well as requiring multiple approvals. But, if a couple of employees can subvert the approval processes in collusion with a vendor, it can be very hard to spot. The vendor may have a more difficult time passing their audits, but if their management is facilitating the fraud, they will be able to hide it as well. Having a person in the purchasing department who never takes a vacation is a bad sign that someone might be trying to hide fraud.
It’s worth noting that a “regular” audit is not trying to comprehensively assess an organization’s internal controls or detect fraud. However, an auditor can be tasked to do so. Those are specialize audits.
In accounting, procurement is ideally segregated into three functions:
– The person who approves a purchase
– The receiving department
– The person who cuts the check
Smaller organizations tend to not segregate these functions and it can be easy for a single person to commit fraud without an auditor detecting it. I am aware of a charitable organization whose in-house controller skimmed over $600k over a dozen or so years.
In larger organizations, the segregation does occur. And, it would be very difficult for a single person to commit fraud. Theft perhaps but not fraud. However, if two persons collaborate, it can become quite easy. Then, add in a third person (an outside vendor) and it’s a done deal.
Now, if services are purchased (as opposed to goods), the two inside persons can form a sham company to “provide” those services. I am aware of a university who had this last example happen to it to the tune of about $3 million.
When I was much younger, I wondered why a company’s stock would get hammered when they missed expectations even by a penny. I have since realized that the Wall Street types assume that if a large company can’t cook the books enough to meet expectations, the company financials must be really bad.
Reno- Publicly traded companies must undergo integrated audits (I.e. includes a report on the assessment of internal controls).
“And what about more subtle forms of influence, such as vendors who pay for lavish dinners or that give nice gifts at the holidays?”
How’s that different from political lobbying, particularly nowadays with republican dark money?
@gary : why were u surprised by flyertalk at all ? they’ve been known for a while as a safer haven for fraudsters. “moderators” is a kind word for mobster
If they weren’t such a large criminal enterprise they wouldn’t need to resort to the silencing of critics while encouraging notoriously fake accounts to push narratives that suit their own agenda by having the most double of moderation standards. streams of lies from their own preferred accounts get a free pass for everything.
No wonder they got so desperate they had to display those gigantic red boxes pleading to end users to turn off ad blockers. They reap what they sow.
Nothing unusual, it’s how our government is run.
I once read that when Sam Walton was alive, Walmart buyers weren’t even allowed to accept a cup of coffee from a vendor.
Ah, Sam Walton. The guy who flew coach when he had the spare change to buy the airline, much less the plane LOL. Granted, coach was a lot more comfortable back then. I miss those days.
His secretary told the story of when he was dying of cancer and he was cold all the time. So she goes to the Walmart next door, takes a $10 heater off the shelf, charges it to the office and sets it up. When Sam comes in he reams her out for wasting money! He is a billionaire, he’s dying, so reasons. Classic Sam!
You know, there is efficient frugality and then there is OCD…..
Oh yes, Jon, that 1970’s buying office was very stark. Drink vending, think
Sam’s Choice sodas and plain coffee ☕. It was a big no-no to buy the buyer a drink…..
If you think a Auditor is going to actually prevent and/or detect all the fraud out there then you agree that the Police and security cameras will prevent all the home robberies. That is NOT going to happen. There is always a way to steal from a company. Everyone takes home paperclips, uses the company printer, uses the internet while working for personal stuff….comes in 10 min late. take 5 min extra for lunch, calls out sick when they are not. takes money from the register, takes items from the store home. etc etc.