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How to analyze discrepancies in your budget

A practice of routinely verifying financial information or searching for discrepancies is critical to identifying fraud, even at its earliest stages. It also will also help to solve problems in the budget that may not be related to fraud.

Corroboration of documentation is an excellent tool for validating financial documents. An example of a way to corroborate financial representation is to verify revenue, review historical budgets and actual results. If actual results have previously averaged 10% below budget and the current year results were 20% over budget, obtain information supporting this exception in performance. Some areas to examine would include changes in budget format or process, purchases or new additions of new product lines, changes in industry, and changes in business. Confirm revenue figures by reviewing shipping records and sales data.

A push to make a financial decision related to a particular customer can be a red flag indicating fraud. Be aware of collusion between an employee and an external client or customer. If an employee is circumventing traditional controls or processes, do some further investigating into the deal. Find out about that individual's relationship with the external client and identify any behavioral changes in the person's performance. To determine the reliability of the financial data provided perform additional verification processes. Proactive measures are the best defense against fraud, misrepresentations, and simple customer error. Have a plan in place to react quickly to fraud allegation and/or indicators. Practice professional skepticism by validating the financial information beyond a mere analysis of financial ratios and trends and to identify fraud, misrepresentations, and error. These factors are critical to making an intelligent financial decision in the face of internal and external risks.

When analyzing discrepancies in your budget it is not uncommon to find inadvertent misrepresentations and mistakes, which can result in poor financial decisions. But be aware that a common form of fraud is falsified financial statements. The forensic accounting approach is a commonsense review of financial, business, and industry data. This investigation focuses on potential problem areas, not on checklists and specific procedures. The forensic review is an intuitive process focusing on patterns and expectations. It identifies red flags and requires the investigator to dig through detailed data to uncover the nature of the transactions.

Four factors are commonly associated with fraud; greed, need, opportunity, and a low expectation of being caught. Internal fraud can be committed by supervisors, managers, and employees. The typical profile of an individual committing fraud is a long-term employee in a position of trust who works long hours and rarely takes vacation or sick leave. Such an employee may have a greater opportunity to commit and manage a fraud, with little expectation of being caught. The first step in identifying the red flags of internal fraud is to determine what is normal and expected. An employee living beyond their means, displaying emotional instability, or evidence of a drug, alcohol, or gambling problem are strong examples. Weak internal control, such as lack of oversight, poor segregation of duties, and inadequate safeguards increase opportunity and lower the expectation of being caught. When investigating allegations of fraud, it is necessary to document the results of the investigation, identify the intent and motive of the individual, and quantify the benefit to the accused and the loss to the company.

Not all budget discrepancies mean fraud, internal or external. But sadly, discrepancies in a company's budget are commonly signs of fraud. Just being aware of the signs of fraud when analyzing your company's budget discrepancies can help you identify fraud at its earliest stages and ensure your company's continual growth and success.

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