Consideration of Pension Fraud

Consideration of Pension Fraud

The Foundation for Accounting Education ("FAE") sponsored a conference on Pension Fraud in NYC on Sept. 9, 1997, which reviewed a federal-state-local multi-agency "crackdown" on pension abuses, and pointed to internal controls and management's vigilence as the best defense against fraud.

Highlights of the conference follow:

1. Statement on Auditing Standards No. 82, "Consideration of Fraud in a Financial Statement Audit"

SAS 82 has imposed new requirements on auditors to specifically consider the risks that fraud may be present, in both the planning and execution of their audits. Auditors will be required to discuss fraud risk and related control procedures with management, as part of their audit.

"As part of the risk assessment, the auditor also should inquire of management (a) to obtain management's understanding regarding the risk of fraud in the entity and (b) to determine whether they have knowledge of fraud that has been perpetrated on or within the entity. Information from these inquiries could identify fraud risk factors that may affect the auditor's assessment and related response. Some examples of matters that might be discussed as part of the inquiry, are (a) whether there are particular subsidiary locations, business segments, types of transactions, account balances, or financial statement categories where fraud risk factors exist or may be more likely to exist and (b) how management may be addressing such risks."

Administrators should be prepared to discuss these issues with the auditors, and trustees may want to have administrators and auditors report the results of such discussions to the board.

The SAS identifies examples of fraud risk factors in two general categories, fraudulent financial reporting, and misappropriation of assets. (See attached list of risk factors related to asset misappropriation)

2. Len Korman, CFE at Chase Manhattan Bank

Len discussed recent cases handled by his department.

Len points to the following Red Flags as fraud warning signs:

Employee has not had an increase in 18 months

Employee has been in the same grade for an extended period of time

Organization is undergoing change: downsizing, etc

Employee living extravagantly

[I would add: fraud can happen when motive, means, and opportunity come together. When an organization's internal controls are lax, the lack of segregation of duties often provides the means and opportunity. The best defense against fraud is to design (and enforce) a system of internal controls that require levels of custody, authorization, and reconciliation, such that undetected theft would be very difficult. -jtc]

3. Possible new obligation to report illegal acts

Securities Law currently impose requirements on auditors to report illegal acts to management and, if management does not make timely disclosure to the SEC, the auditor is required to notify SEC directly; similar rules have been proposed as amendments to ERISA which, if enacted, would require auditors to notify DOL of illegal acts.

4. Govt Pension Abuse Initiative

DOL and Dept of Justice discussed the joint agency "Pension Abuse Initiative". The agencies reported numerous cases of misapproriation of pension assets; however, they made it clear that "underreporting" pension contributions is also a serious criminal offense. See Joint Agency Release.

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