A lifestyle audit is the term commonly used by forensic auditors and management in companies to describe the tests that are performed to determine if the lifestyle of an employee is commensurate with that person’s known income stream. The employer has detailed knowledge of the remuneration which they pay to the employee, but often management will only have rudimentary knowledge of the staff member’s lifestyle.
Fraud and corruption is usually committed by means of “off book” transactions or manipulated accounting records. It is very difficult to detect and dishonestly inclined professionals are able to conceal their frauds with disturbing alacrity and ease, particular in work environments with weak controls or limited segregation of duty. Sometimes the only clue to the illicit activities is a sudden unexplained change in an employee’s lifestyle. The lifestyle audit is therefore a critical management tool to identify staff members who, based on an extravagant lifestyle, may potentially be engaging in illicit activity. It is also one of the few mechanisms that organisations may utilise as a first step towards discreetly determining whether a “tip-off” of suspected fraudulent activity, potentially has merit or not.
When a detailed lifestyle audit is performed on an employee implicated in fraudulent or corrupt activity, it is often also described as suspect profiling or business intelligence.
Lifestyle audits are not conclusive
The results of the lifestyle audit are an indicator, or a clue that something may be amiss, but can never, without further evidence, be regarded as conclusive proof of illicit activity. There may of, course be a perfectly reasonable explanation for what on the face of it, may appear to be an extravagant lifestyle; these explanations include an inheritance, or a wealthy partner or family member providing financial support, which is not known to the employer. The results of the lifestyle audit must accordingly, be approached with caution
What is the lifestyle audit?
The lifestyle audit is simply an amalgamation of reports from a variety of databases, which provide management as well as investigators with a snapshot into certain aspects of the life of an employee. Lifestyle audits are a legitimate fraud prevention and detection mechanism.
The areas that are often included in a basic lifestyle audit are properties, motor vehicles, company registrar information and credit histories. The first three categories are all publicly available data which anyone can access. Forensic firms subscribe to a multitude of public databases to gather business intelligence on individuals and companies and are able to compile electronic reports within a number of hours.
The use of credit information is strictly controlled
The use of credit information is strictly controlled by the National Credit Act, 34 of 2005, however Section 17(4) (b) of the regulations of the National Credit Act specifically provides for the use of credit information for fraud prevention and detection services. Classified information can never be used in the lifestyle audit.
Personal financial info requires a court order
Personal financial information and cellular telephone information cannot be accessed without a subpoena or court order; alternatively it can be secured with the consent of the employee. The same applies to a prior criminal history. Where fraud is suspected, the company will have to register a criminal case based upon a reasonable suspicion usually entailing prima facie evidence, which the authorities will use to motivate a judge or magistrate to authorise the subpoena.
What do forensic auditors look out for?
What forensic auditors look out for is an excessive lifestyle, for example, properties or motor vehicles where the monthly repayment exceeds what would be reasonably affordable to the employee concerned. Often the properties are bond free, which begs the question as to how the capital was raised for the acquisition. Many fraudsters accumulate portfolios of properties and launder the stolen funds by purchasing properties and renting these out thereby generating “clean” money.
Company checks often reveal conflicts of interest or undisclosed related party transactions
The company register check is an invaluable mechanism to detect conflicts of interest where staff members are potentially operating business in conflict with the employers business or there are related party transactions where employees have failed to declare an interest in business entities which supply goods or services to the employer.
The recession has resulted in an escalation in fraud
Credit information, revealing bad debt or judgments is a crucial fraud risk indicator as the financial pressure may induce employees to potentially steal from the employer; the current recessionary environment has resulted in a major escalation in incidents of employee dishonesty.
Lifestyle audits are an excellent barometer of the extent of the fraud risk within an organisation. Companies must make use of this proactive anti-fraud mechanism to protect themselves before they fall victim to fraud and, in some instances, to identify fraud which is happening right under their noses!