The tone at the top may be tinny.

• Position: Excerpt

Any company is vulnerable to fraud perpetrated by various people associated with the company. One of the vulnerabilities a company faces is lack of integrity among senior management. Controls over management and financial reporting may be ignored or overridden, allowing customers, sales, and company assets to be diverted to other entities and beneficiaries. Here is a classic case study of such diversion excerpted from the recently updated CPA's Handbook of Fraud and Crime Prevention (New York: AICPA, 2004).

Purchasing, sales, and inventory are, of course, managed by the administrative personnel and systems that pay suppliers, collect cash from customers, keep a record of all that goes on and, finally, report on the financial affairs of the business. While not exercising hands-on physical control of the assets, these employees are in positions of influence or control and can manipulate recorded information or cause false information to be recorded to paint a rosier picture than is actually the case.

The culture of a business is reflected in the personality and style of senior management and goes a long way to defining the risks and vulnerabilities of the whole enterprise to fraud. Often, in small and medium manufacturing businesses, the owners and senior management are one and the same. They may have walked the rocky road and fought hard to achieve success and want everything done their way. Through the use of their intimidating personalities, unwillingness to share information, or their neurotic determination to control all processes right down to the lowest administrative levels, a senior person can make an ordinary, honest person do improper things.

Administrative and management employees may act dishonestly in several ways, depending on the position and level of authority. Such dishonesty may occur in the form of diversion of customers and sales away from the business to personal companies or to others in return for a financial benefit. Alternatively, there may be a diversion of company assets away from the business for use by personal companies or to others in return for a financial benefit.

Case study: Hot off the press

A medium-sized commercial printer in the Midwest remained family owned for three generations, with family members working their way through the company to the post of chief executive officer (CEO). However, the family had become widely dispersed and many...