Reasons for Frauds, Preventing and Perpetration of Frauds in Organization - Essay Example

Table of Contents Introduction 2 Reasons for Frauds 2 Type of Frauds 3 Preventing Frauds 6 Perpetration of Frauds in Organization 9 Conclusion 9 References 11 Introduction Frauds have become a part and parcel of every business transactions. The global financial crisis in 2008 has further highlighted the manner in which frauds takes place in the financial sector and has highlighted the different gaps which provides an opportunity for people to commit such acts. Frauds always result in creating a negative impression and require that the business is able to develop effective strategy through which those acts can be reduced. This report looks to highlight the manner in which fraud risk can be prevented in banks and looks to present a report to the CEO from the auditor general which will highlight the different type of frauds which can take place, the manner in which those frauds can be detected and strategies which will help to prevent those frauds from taking place. This will thereby help to provide a complete overview which will provide the required guidance through which steps are developed to reduce the chances of frauds and will ensure that the overall efficiency of the business can be improved. Reasons for Frauds Frauds takes place due to dysfunctional governance which is matched by institutional failures to develop rules which looks to ensure transparency, promotes effectiveness and ensures accountability so that the different functions of the business are carried out effectively. Banks are continuously witnessing frauds and have been due to different factors which have increased the level of risk and require proper measurement of the frauds so that it can be prevented (William, 2010). Corruption is identified as one of the prime reason which has increased the level of frauds and arises due to the corrupt management practices which executives or employees within the organization look to indulge at. Some of the corrupt management practices which are being found to contribute towards frauds are as The acceptance either directly or indirectly by an employee or an executive within an organization, some monetary or non monetary benefits for which the person had to abstain from some act or duty which had to be carried out (Dastrup and Carson, 2009) An act where the person knowingly or unknowingly acted in a manner which resulted in omission of certain duty or act which thereby had a negative influence on the shareholders and others related to the organization (Dastrup and Carson, 2009). A promise or an offering which has been directly or indirectly been made with the purpose of ensuring that the person acting in behalf of the business indulges in act which leads towards spoiling the name and creates a situation where some unlawful activities takes place (Dastrup and Carson, 2009) Thus, the different reasons which has led towards frauds is due to the fact that people involved in frauds look to gain from it and look for their personal gain instead of looking for the gain which the entire organization can have. Type of Frauds In accordance with the manner in which manner in which frauds are being felt within the organization especially public sector organization and banks has determined the level of corruption to be based on different typology as Petty Frauds: This type of frauds takes place at a lower level when people involved at the front level don’t carry out the activities which the front line people are expected to do thereby resulting in the creation of frauds Grand Frauds: This type of frauds takes place at the highest level and results in improper policy making process, design and appointment of people who don’t carry out the activities. This results in the misappropriation of funds and thereby creates frauds Systematic Frauds: This type of frauds looks to adopt a mix of petty and grand fraud and sees a higher level of corruption which thereby has an impact on the overall decision making and thereby impacts the manner in which decisions are taken and results in more fraudulent activities to take place In addition to it the manner in which frauds take place further has an impact on the level of performance as frauds takes place at different levels and will thereby have an impact on the performance which has been shown below as Frauds in everyday action: This type of frauds takes place every day when the level of interaction that takes place within the banking organization results in the creation of frauds. This has thereby resulted in different fraudulent activities like bribes, favors and other forms of fraudulent activities to take place (Wang, 2010). Frauds internal to public sector: This type of frauds takes place due to activities like payment to superior, payment for public position and so on. This results in increased frauds due to leakage of information from the interiors. This form also gives rise to some form of insider information and thereby creates a situation through which the public sector frauds increase (Wang, 2010) Frauds on policy making level: This type of frauds looks to increase the complexities through which policies are not drafted in the best possible manner. This will thereby lead towards development of public relations which is aimed at hampering the level of interaction and will result in faulty policy making and will result in the creation of frauds (Wang, 2010) This type of frauds has further looked to be strengthened due the manner in which different frauds have taken place lays emphasis on the manner in which frauds takes place. This has helped towards the identification of the following type of frauds which takes place in the banking sector Employee Embezzlement: This fraud takes place when an employee or a group of employee come together and look to hide different information so that it can be used for their own purpose. This creates a negative impact and results in diluting the manner in which the resources were used for the benefit of the organization (Scott, 2009). Vendor Frauds: These frauds take place when the organization looks to get substandard materials from the different vendor and looks to provide materials which have an impact on the final outcome (Scott, 2009) Customer Frauds: There frauds are witnessed by the banking sector where they look to default on the payment and don’t pay the money which has been collected by them thereby defaulting both the interest and the final payment of the sum. This has thereby resulted in impacting the overall performance and has affected the manner in which frauds takes place in banks (Scott, 2009) Management Frauds: This fraud takes place when the management indulges in some activities which look to go against the required strategy which has to be adopted by the banks to perform their duties effectively. This results in a mechanism where the person look to find out the manner in which different stakeholders look to develop their strategy and will thereby have an impact on the manner in which the banks perform (Scott, 2009) Thus, the bank has to deal with different type of frauds and will require that proper strategies are developed through which the impact of the frauds can be reduced and overall effectiveness can be gained in the system. Preventing Frauds To deal with the manner in which frauds are increasing the bank has to look towards developing a mitigation strategy which will help to provide the required framework and help to develop the required strategy through which frauds can be prevented and the overall efficiency of the system can be increased (William, 2010). This can be achieved as follows Ethical Code of Conduct: Bank has to develop an ethical code of conduct which will help to deal with the increasing complexities and ensure that all employees at all level works according to the code which has been provided. It will be mandatory for all employees to work under the code and proper explanation of the code should be provided to the employees. This will help to understand the manner in which the banks work and will determine the manner in which decisions are taken. Employees should further undergo a training program which will help to understand the different aspect of the working scenario and will ensure that they work according to the professional code of conduct (Povel, Singh and Winton, 2007) Identifying the reason for frauds: The management has to ensure that proper strategies are developed which looks to monitor the entire style of working. This will help to find out the reasons which have led to frauds. Upon identification of the fraud proper strategy should be implemented and decisions should be taken which will help to correct the mechanism of working and ensure that such acts don’t take place again in the future (Povel, Singh and Winton, 2007). Develop an honest culture: The bank has to focus on developing a culture which makes the people working for the organization to be fair and honest. This will require that employees who are found to be dishonest should be immediately removed and steps would be taken which will help to improve the overall mechanism and develop a culture where decisions are taken in a fair manner (Povel, Singh and Winton, 2007) Whistle Blowers: The bank has to look towards hiring whistle blowers who will look to ensure that any act which could lead towards frauds is highlighted and brought to the notice of the management. The role of the whistle blower will be to notify all instances to the management. This will also help in developing the required liaison through which better identification of the manner in which work is carried out can be found out and thereby ensure that frauds reduces (Muolo and Padilla, 2008) Improved Monitoring: The bank has to look towards hiring the services of an external agent who will look to carry out the activity of monitoring the activity. Improved monitoring will help to ensure that all the activities which are taking pace within the organization is monitored and will thereby help to reduce the chances of illegal activities taking place. Also having the services of an external agency will ensure that the agent who has been hired on behalf of the stakeholders looks to perform his duties and ensure that the shareholders are prevented from any fraudulent activities. This will thereby control the entire process of carrying out activity and will multiply the effectiveness of carrying out activities (Muolo and Padilla, 2008). Conducting Fraud Audit: The bank has to further develop a strategy which lays emphasis on conducting audit trails and looks to have sudden and surprise checks. This will help to reduce the chances of fraud as the fear that they will be caught and will result in hampering the brand image will reduce the chances of indulging in such activities. This will also ensure that the employees perform according to the required standards and will be able to develop a mechanism through which better activities are carried out and will help to reduce the chances of frauds in the future (Muolo and Padilla, 2008) Thus, it helps to find out the different reason which leads to fraud and also presents the manner in which different strategies have to be developed so that frauds can be dealt in the most effective manner. Perpetration of Frauds in Organization Different reasons which lead to frauds have been identified and show that the prime reason underlying frauds are the opportunity to make money. The prime reason that it provides an opportunity to make money and increase the chances of having some additional funds has thereby increased the number of frauds which takes place (Gary, 2008). The fact that one fraud leads to the others and the process continues thereby creating a circle which gives rise to an environment where people look to indulge in different activities and thereby has an impact on the overall performance of the organization. This also creates an environment where there is unrest and leads towards a scenario where decisions taken don’t provide the required effectiveness and leads towards having an impact on the overall working of the organization Conclusion This report thereby explores the manner in which frauds are increasingly taking place in banks and provides a strategy which will help to reduce those in the future. Frauds always result in creating a negative impression and require that the business is able to develop effective strategy through which those acts can be reduced. This report looks to highlight the manner in which fraud risk can be prevented in banks and looks to present a report to the CEO from the auditor general which will highlight the different type of frauds which can take place, the manner in which those frauds can be detected and strategies which will help to prevent those frauds from taking place. This will thereby help to provide a complete overview which will provide the required guidance through which steps are developed to reduce the chances of frauds and will ensure that the overall efficiency of the business can be improved References Dastrup, S., and R. Carson, (2009). The Housing Price Bubble: Data Mining to Explain Variations in the Fall Across Metropolitan Areas. Paper presented at Salford Data Mining Conference Gary, B. (2008). The Subprime Panic. Yale ICF Working Paper No. 08-25. Retrieved on April 25, 2013 from http://ssrn.com/abstract=1276047 Muolo, P. and Padilla, M. (2008). Chain of Blame: How Wall Street Caused the Mortgage and Credit Crisis, Hoboken, NJ: John Wiley and Sons Povel, P., Singh, R. and Winton, A. (2007). Booms, Bust and Fraud. The Review of Financial Studies, 20 (4), 1219-1254 Scott, H. (2009). The Financial Crisis, Systemic Risk, and The Future of Insurance Regulation. Essay in “Issue Analysis,” National Association of Mutual Insurance Companies, Retrieved on April 25, 2013 from http://www.naic.org/documents/topics_white_paper_namic.pdf Wang, S. (2010). Risk Intelligence and Risk Indices. Paper presented at ERM-II Systemic Risk Workshop, May 11-12 William, B. (2010). Why Regulators Must Fight ‘Control Fraud’ Like Public Health Specialists. Retrieved on April 25, 2013 from http://ssrn.com/abstract=1536527 Terry, F. (2004). FBI Warns of Mortgage Fraud Epidemic. CNN, Sept. 14, 2004 Read More