The Recommendations on Effective Fraud-fighting Strategies - Thesis Example

University Name Institution A report that presents recommendations on effective fraud fighting strategies for Newcrest Mining Limited Thesis Student Name Supervisor Submission Date 1.0. Introduction Fraud refers to an act of intentional deception to an individual which often results to in injury to the victim. The form of injury differs. It can be physical, mental, financial, psychological or even social (Acharya & Matthew, 2009). Globally, fraud is a crime. As such, there are various laws to govern fraud in all these countries. The rates of fraud are always increasing day in day out. The types of fraud vary. They include sales of misrepresented products or services, failure to deliver work, goods or services that have been paid for, confidence schemes, non-existent investment opportunities, credit cards schemes, non-functional health products, fake charity organizations, insurance fraud, fake lottery or promotion prizes and many others. The emerging competition in the accounting services industry have made accounting firms have resorted to shady behavior to remain in the market, which includes adding consulting services to the firms they audit, and thus creating a conflict of interests as accentuated by Ronen (2010). This dual role, Newcrest Mining Limited requires an absolute independent auditor – and the subservient role of a consultant that requires the subsidiary role is being performed for the same company for a long time. This was ignored by the public and authorities as there was no problem that surfaced until the Enron Scandal broke out where the auditor in the role of the consultant interfered with the accounting process and gave out false statements about the companies’ financial position. There is a possibility that the company may not accept a highly moral auditor who is inflexible and not amenable to leniency as far as ethics are concerned. 2.0. Concept of fraud around the world Fraud incidences lead to property loss, physical harm, psychological harm and financial harm to the victims. Almost all fraud cases end up in a lot of anger and resentment by the victims towards the perpetrators (Button et al., 2011). Before an incident of fraud happens, the perpetrator has to lay down careful plans that will entice the victim to participate willingly. As such, the scheme must be related to something real that exist. The victims fall prey to such fraudulent acts simply because they appear real. It is of vital importance that the victim selection process is analyzed in order to be able to solve the problem of fraud Acharya & Matthew, 2009). The history of fraud goes back to the history of man. The cunning nature of human beings brings out their fraudulent nature. There are numerous individuals who would like to make it big in life without actually working hard. As such, the cases of fraud will always exist. The forms of fraud evolve with the ever changing world. The more technology evolves the more complex the fraudulent methods of the world become. High tech fraud mechanism is being invented to trap the currently smarter population. Fraud cases are responsible for various losses in the global economy. Based on data from the Association of Certified Fraud Examiners, 5% of the total revenue is lost to fraud by a typical organization every year. The global estimates of losses cause by fraud in the year 2011 were $ 3.5 trillion. This massive loss indicates the financial and economic position of the victims of these fraud cases. In the United States, it was estimated by the Federal Trade Commission that in the year 2005, there were about 48.7 million individual fraud transactions. The average loss that was experienced per transaction was $60 (FTC, 2007). According to the Fraud Enforcement Task Force, in 2010, more than $8 billion losses were experienced in commodity fraud, securities fraud and investment fraud (Button et al., 2011). 3.0. Types of Frauds The shame, embarrassment and the guilt feelings that come with being duped in a fraud incident makes it difficult for many victims to come out, accept that the incident happened and report the events to the relevant authorities (Walsh and Schram, 1980; Antif & Amir, 2008). This makes it difficult for the actual statistics on fraud cases to be established. After being victims of fraud many people find it difficult to trust others especially when it comes to monetary issues. Sadly, the society undermines fraud and other white collar crimes. In the news and events, crimes that involve robbery, and other blue collar crimes are given more priority. This is the same case with the police and other law enforcement agencies (Cullen et.al, 1983). 3.1. Employee embezzlement fraud Employee embezzlement fraud is very rampant in workplaces, and does not encompass any form of force or violence. Sometimes also known as white collar crime, it does commonly involve employment relations in where the employee embezzles funds of the employers or property. The victims of fraud are not just singled out individuals. According to Tomlin (1982), the victims range from corporations, the society, governmental institutions, and the international order. However, to know why some individuals are victimized in fraud incidents analysis has to be done on situations that lead to these incidences. 3.2. Customer fraud Customer fraud involves deception instances by clients, for example deceiving a seller or retailer by concealing their real identity for purpose of soliciting free goods or money. Another lot of victims of fraud are the people who always want free things in life (Antif & Amir, 2008). As much as an individual may have the capacity to purchase an item at an affordable price, many people tend to prefer free items. A simple search of the word free on Google gives more than 8.65 billion results. This clearly shows how much free stuff is preferred. In order to get the “free stuff” individuals have to feel form that require personal data (Acharya & Matthew, 2009). 3.3. Investment fraud (scams) This is a deceptive practice in the business ventures or financial markets that may induce a person or investor to buy (invest) based on false information availed. Such frauds result to heavy losses at the market that could be incurred by a number of various institutions, for example during the credit crunch in United States mortgage market. First, there is an element of cooperation in the fraud incidents (Antif & Amir, 2008). When there is totally no corporation, the victim usually gets to know that a crime has been committed against him or her after some time. The second case is where the victim partially cooperates with the fraud perpetrator. For example, an individual gets a phone call from an anonymous individual asking for a contribution to a charity event. The charity can be a scam and this shows partial cooperation of the victim. Full cooperation of a victim happens mostly in investment fraud cases. An individual is given an opportunity to invest and after assessment establish that the investment is valid. The investment can be a Ponzi scheme which will lead to financial loss. In all these cases, the socio economic aspect of the victim is put into consideration by the perpetrator of the fraud case. According to Delord-Raynal (1983), cooperation is not the only aspect of fraud. He states that most of the victims of fraud cases are usually “wannabes”. These are individuals who are desperate to become rich and will do anything including fraud to make a living (Dornstein, 1996). Many victims of investment fraud are usually aiming at earning a lot from nothing or the minimum investment which is not the case in the real business world. The effect of sub-prime mortgage crisis that has been visualized in history dating back to days when credit regulators in U.S took for granted the past lending standards to be conventional by getting rid of stringent guidelines that were thought unnecessary so as to allow lenders to structure loan product (mortgage) that could fit the ineligible borrowers as far the mortgage lending system was concerned (Button et al., 2011). 3.4. Management fraud Management fraud involves misappropriation of resources available within a particular organization by management in pretext of using to accomplish the organization set goals or targets. This leads to cases of fraud as the sensitive data can be targeted by con managers. People who want something for nothing end up paying the price for fraud (Aronson, 1992). However other fraud cases target the honesty of individuals these involve scams that have to do with bank inspectors, building inspectors, and charities. The unsuspecting individuals fall prey to these devices thinking that they are being honest citizens. 4.0. Cases of fraud in banking Recently, cases after cases of accounting fraud have been heard and investigated. Most of these cases involve the unethical behavior of the auditors themselves. This is a grave issue, considering these cases can lead to snowballing, first making the companies lose customers, eventually negatively affecting the stock market. However, literature established that here is a distinction between what is legally and morally right (Acharya & Matthew, 2009). Law is not concerned with feelings or morals, and things that may be morally wrong may be legally right. The question cannot be addressed straightforwardly because there are many issues in considering ethics and the professional conduct of the auditor and the company being audited. Antif and Amir (2008) argue that the essential ethical ideologies and the severity of the contingencies and the individual ethical reasoning are components of the ethical decision-making process. Auditors’ failure to adhere to ethical standards can lead to business and financial scandals through case studies. 5.0. Fraud detection in banking institutions Before a credit risk is managed, it has first to be measured. A detailed and correct analysis should be carried by Newcrest Mining Limited to investigate a bank that has high exposure of portfolio. The theory that measure and manage credit risk comprises three key roles; to estimate the possibility of default by a borrower, measure the likely value of defaults and measure the relationship between default risk and credit exposure portfolio. The level of exposure is said to have an effect on the exposure at default (Acharya & Matthew, 2009). Thus, any rise in the level of exposure could trigger a more detailed credit review of the respective borrower in a particular bank or lending agency. The past and recent financial crisis both in financial and non-financial institutions shows the need to initiate several forms of risk management in their systems. Financial mishaps are not a new observable fact, but something briskness that financial institutions can find themselves in. 6.0. Fraud investigation Banks, similar to other lending agencies must meet regulatory frameworks for fraud investigation, management and monitoring, and satisfy a particular capital threshold to key liquidity risk at bay. However, it is with error to suppose that attaining regulatory needs is imperative for establishing a reliable, systematic fraud management system (Antif & Amir, 2008). Credit managers of Newcrest Mining Limited require a sound fraud measures to safeguard capital in activities with suitable risk (best risk) and reward ratios. They need to measure up the magnitude of possible losses so as to stay within obligatory limits of mostly available liquidity, by creditors, clients and regulators. They require mechanisms that could help the company monitor the positions of associated risks and form incentives for discreet risk-taking by responsible departments and persons. Since the fraud crisis in banks tend to be rooted from bank system itself, that is management (governance) and capital structure. Regulatory reforms could be embraced in these areas. Start with governance and then risk management in bank’s capital structure (Button et al., 2011). Regulators could carry out a coordinating role in circumstances where individuals’ actions within the bank become compromising to the sustainable competitive edge of the institution, like supporting the restructuring of workers remuneration package at the expense of investment strategy could result on tail risk. However, more hard, but equally worthwhile, Newcrest Mining Limited’s CEO should present a clear picture for incentive taking care of fraud. 7.0. Fraud prevention The most basic credit fraud management processes in banking industry comprise of risk-adjusted pricing of personal loan transactions, establishing risk limits for portfolios, use of guarantees, and securitization of risks by credit insurance, and trading of assets. Fraud prevention measures should be undertaken to assess whether cases of fraud exist within a prescribed limits, thus assist in making sure bank’s capacity to bear these risks. According to Reischauer (2007), risk-bearing capacity of a fraud entails bank’s ability to cover the risks connected to banks as regards to existing financial funds, for example capital, revaluation of the reserves and profits. In such cases, occurrence of a fraud impact like losses will be taken care of by these funds as a coverage capital. Thus, the level of existing coverage capital will limit the extend of unsecured transactions a bank should take in as a basis of business strategy and risk strategy, given that the risk permits only certain transactions to be secured by the coverage capital. There are several mechanisms that Newcrest Mining Limited may use to analyze and manage the fraud risk in a financial market. A careful and timely utilization of these mechanisms will help the company analyze the fraud associated in their investment and improvise strategy to manage the risk. The mechanisms include (a) Monitoring the trend of the market: this is the most common mechanism that investors use to minimize the two risks in a share market. The only hitch with this method is the intricacy of figuring out the trends in the market as they change incredibly fast, for example, a market trend may last even for one day (Kidwell et al, 2010), (b) Portfolio diversification, which is perceived to be the best mechanism that banks use to mitigate unsystematic risk as they are not linked to any market risk. Banks who own diversified number of share portfolios minimizes the risk exposure to their investments compared to ones that have one share portfolio. Mutual Funds are yet another means to diversify the impact, (c) Asset allocation: it is believed asset allocation can partially mitigate systematic risk. By owning different kind of asset classes, with low correlation, an investor will have low portfolio volatility (risk) for the reason that asset classes act in a different way to macroeconomic elements. While in some cases the portfolio of asset categories could be rising some may be diminishing (Barnett et al, 2010), (d) Stopping losses: the stoppage of losses is also another mechanism that investors employ to analyze and manage risks. This helps them to make sure that they don’t lose money easily should the securities collapse in the share market. In this mechanism the investor has the choice of walking out of a share market should price fall lower than a preferred specified limit and (e) Self-discipline: This is yet another alternative investors uses to dispose of their stock when there is steep fall in price. This is drawn from Warren Buffet, the ever best investor in stock market who pronounced “don’t lose money” 8.0. Conclusion Fraud is one of the most burning issues globally in the banking sector. In this regard, fraud prevention has been a concept that has been tested in different continents since the 1970s. The attributes of a victim have been constructed in order to help reduce the billions of dollars that are lost to fraud every year (Acharya & Matthew, 2009). Fraud cases may vary from country to country but its effect affect the global market, especially if it is for banks. To avoid the happening of any major occurrence of global credit crunch in 2007, banks need to improve their fraud and risk management procedures with a close look at tests and scenario analysis. In general the fraud crisis has taught as a lesson on need to strengthen the value of risk management for firms (Wihlborg, 2010). Newcrest Mining Limited should utilize this technology in coming up with security systems to assess the liquidity level and extend at which the bank is exposed on credit risk is important. This may greatly curb fraud cases and improve the level of development in the modern world banking sector, and as such, restore back the people’s confidence and boost investment in all sectors of the economy. References Acharya, V., and Matthew, R. (2009), Restoring Financial Stability: How to Repair a Failed System, New Jersey: John Wiley and Sons Inc., Hoboken. American Association of Retired Persons (1997).Comparative Findings from the 1996 & 1997 Omnibus Surveys on Telemarketing Fraud. Washington, DC. Antif, M. & Amir, S., (May, 2008). The consequences of mortgage crisis expansion: evidence from 2007 mortgage default crisis, University of Chicago Graduate School of Business. Antoniou, A., Ergul, N. and Holmes, P. (1997). Market efficiency, thin trading and nonlinear behavior. European Financial Management, vol. 3, pp. 175-190 Button, M., Lewis, C. and Tapley, J. 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