Effective Fraud Risk Assessment and Fighting Strategies - Essay Example

Effective fraud risk assessment and fighting strategies Student Name: Institution: Date: Introduction Fraud is commonly associated with activities such as theft, money laundering, conspiracy, bribery, extortion, corruption and embezzlement. Essentially, fraud involves use of deception to dishonestly take a personal gain for oneself and causing another to lose. Organizations are required to be more serious about fraud control. It is crucial for the organizations particularly those involved in financial management to invest more in managing fraud risks as well as in investigating the suspected fraud instances that are specific to their services. Financial agencies that have not taken a step to prevent, detect and investigate fraud cases often face two major risks. In the first place, the potential fraudsters assume that the risk of detection is lower and secondly, there will be less effective investigations that can be relied on to determine the complete extent of fraud (Fraud Advisory Panel, 2006). The increase in risks of fraud has been as a result as growing globalization, rapid technological developments, increased competitive markets and changing periods of the economic difficulties. Therefore, management accountants particularly those in the profession of training and analysis of information systems should play a significant role of developing and implementing ant-fraud measures in their organizations. It is worth noting that the techniques used for fraud prevention and the worth investing in may not offer 100% protection against fraudulent perpetrations. This implies that it is difficult to entirely remove the likelihoods for perpetrating fraud. A consistent and comprehensive response to suspected and detected incidents of fraud is also important. This sends a message that fraud is taken seriously and that action will be taken against perpetrators. Each case that is detected and investigated should reinforce this deterrent and, therefore, act as a form of fraud prevention (Ernest & Young, 2003). Different types of fraud that can be perpetrated on individuals and organizations The company’s board of director needs to be aware that fraud can mean various things and may result from different relationships between the offenders and victims. The common examples of frauds that can be perpetrated on individuals and organizations include, crimes caused by individuals against their consumers, for instance, misinterpretation of quality goods and services, payroll frauds, thefts of cash and assets, false accounting and expense claims, breach of intellectual property rights that caused by employee against his or her employer as well as pyramid types of trading schemes. There could be also crimes against the financial institutions, for example, use of lost or stolen credit cards as well as fraudulent cheque and insurance claims. Furthermore, businesses involve in crimes against their investors, employees and consumers by creating fraudulent financial statement, avoiding overtax pay and selling of the counterfeit goods purporting to be genuine ones (Ernest, K & Young, P (2003). It is crucial for the company’s board of director to have comprehensive information of the schemes used by the professional criminals who involve in crimes against larger organizations. Such frauds include mortgage frauds, corporate identity frauds, money laundering, advance fee frauds and increased counterfeiting rings. Today, it cannot be doubted that there is increased rates of e-crimes caused by individuals using computers and information technologies to commit crimes. Copyright crimes, social engineering frauds, phishing spamming and hacking are the common e-crimes that the company’s board of director should be advised to avoid and monitor risks associated with such unwanted activities that can cause negative impact on the employees and the organization at large. Risks related to false accounting such as theft of cash and assets need to be evaluated and monitored in each section of the business operations in the company (Barta, 2011). Generally, a number of businesses focus more on limited cases of risks particularly on the third party thefts which not an effective approach to risk management against fraud-related cases. In order to avoid this, therefore, it is necessary the management of the company to classify risks by reference to include the likelihood type of the offence as well as the potential perpetrators. Factors such as motivation of the potential offenders, availability of opportunities to commit crimes, suitability of targets as perceived by the people involving in fraudulent acts are the general reasons for people committing frauds (Wells, 2007). Preventive controls that can be designed to reduce cases of fraud and the associated misconducts from occurring in the organizations Internal Audit Function plays a key role in antifraud activities particularly in developing preventive controls that can be used to reduce cases of fraudulent occurrence in an organization. Therefore, the company’s board of director needs to note that the function of Internal Audit is supporting the managerial approach to the prevention and detection of fraud activities and the associate misconducts. The findings of a survey conducted by KPMG’s (2006) indicate that frauds can be uncovered through the work accomplished by the internal audit. It is the responsibility of the internal audit to plan and conduct an evaluation of on design and operational effectiveness of an organization’s antifraud controls. The internal audit should also participate in the assessment of an organizations fraud risk as well as draw relevant conclusions on the appropriate fraud prevention strategies. However, the internal auditors should report to the audit committee on all the internal control assessments and investigative audits carried out in the organization (KPMG’s, 2006). Risk assessment on the likely fraud and misconducts is also a major preventive control the company’s board of director should focus on to minimize fraud-related activities. It is worthy noting that all organizations across the world face different fraud and misconduct risks. In a similar manner as to how the conventional-entity based risk assessment is conducted, a fraud and the associated misconduct risk assessment should enable the management to identify those risks that negatively affect their businesses as well as mitigates existing gaps in control. It is critical for the company’s board of director to ensure that fraud risk assessment is conducted entirely across the departments of the organization. The main procedures undertaken in fraud risk assessment process are illustrated below (Helenne, 2008). Although it is the responsibility of the management to conduct a targeted risk assessment process as well as taking into account its outcome in the evaluation of control effectiveness, it should be noted that the audit committee takes the oversight role in the whole process. Thus, it is the responsibility of the audit committee to review the management’s fraud risks assessment. This will help the management to take it as an on-going effort that requires them to interact with the entity of independent auditor so as to achieve properly communicated assessment results (Helenne, 2008). Code of conduct and Employee Due Diligence are also important approaches to enhancing preventive controls to reduce fraudulent cases and misconducts from occurring in the organization. The management requires a well-written and ensures clearly communicated code. This should go beyond the restating of the company policies such as the raising of awareness of the managerial commitment to integrity and compliance goals as well as promoting overall control culture for the organization. Therefore, the company’s board of director will be required to make a clear code of conduct that will typically provide a practical guidance on the fraud-based risks and recognizable scenarios, topical approach to company’s key policies and compliance risk aspects. However, tools for ethical decision-making should be adopted to enable the employees make rightful choices that will not lead them into unethical behaviors (Institute of Business Ethics, 2003). Employee due diligence should be applied when the management is hiring, retaining and promoting employees or the company’s agents and vendors as their third parties. Employee due diligence should be highly exercised by those employees that have more authorities on the company’s financial reporting process. The company’s board of director need to be informed that employee due diligence begins at the onset of employment and should continue throughout the business operations. Generally, the senior management plays an integral role of ensuring that fraud and misconduct controls are sustainably and effectively implemented based on the governmental standards. This implies that the main responsibility for the organization is to provide an effective approach to mitigate and manage risks associated with fraud and misconducts across the shared senior levels of the organization. In this case, direct responsibility for promoting antifraud efforts must reside with the senior leader who is expected to work closely with the internal audit officer as well as other designated experts for different subject matters (Turner, 2007). Mechanisms of control and governance that can be used to prevent and detect fraud in contemporary organizational settings Due to the prevalence of fraud cases and their negative consequences, the company’s board of directors should be advised to invest more time and resources on tackling fraud. However, it may seem difficult on the management to decide on whether to commit the resources on preventing or detecting frauds. Fraud prevention measures should be designed based on the major reasons as to why people involve in fraud activities. Therefore, effective ways of handling the problem of fraud should be considered, for instance, adopting methods that can reduce motive, restrict opportunities as well as limit the schemes for potential fraudsters can be used to rationalize their actions. Preventive controls should be used in situations of deliberate acts of fraud so as to minimize the opportunities of such activities and control temptations from the potential offenders. It is would be important for the company’s board of director to introduce policies, procedures and control measures in addition to training employees on fraud awareness to discourage fraud from occurring. Fraud prevention activities are critical to preventing losses in the organization and ensuring stable or continued operation of businesses (Wells, 2007). Fraud detection is equally important for the organization because fraud prevention measures may not fully control all the potential perpetrators. Therefore, the company’s board of director should ensure that use systems that will effectively detect the occurrences of frauds earlier enough and through their business operations. However, a consideration must be given on the fact that an effective fraud detection strategy has to involve application of analytical as well as other procedures to identify anomalies. Important to mention, reporting mechanisms that can provide clear information or communicate the suspected fraudulent activities need to be introduced. A complete fraud detection system must comprise of exception reporting, on-going risk assessment, data mining and trend analysis (CIMA, 2002). Conclusion In general, fraud prevention and fraud detection plays a significant role in the management of risks that lead fraudulent activities, and thus it is not possible that either of the two will entirely succeed without involving the other. Therefore, it is crucial for the company’s board of director and the contemporary organizations at large to take into consideration both fraud the prevention as well as fraud detection while designing a more effective strategy that can be used to manage the risks of fraud. Although fraud has become prevalent across organizations of various sizes and within all the sectors and locations, some business models will be required to consider greater levels of the fraud risk than others do. From the above analysis of the different types of frauds that can perpetrate on individual and organizations, it can be concluded that the control environment for frauds must be adjusted so as to fit with the level of risk exposure. References BDO Stoy, H., (2008). Fraud-track 5: A global challenge, BDO Stoy Hayward publishers. Retrieved May 2, 2013 from, Barta, D., (2011). Selecting a hybrid approach that can be used to fight fraud in a more effective manner. Enterprise Fraud Strategy at SAS. CIMA, (2002). Risk Management: A guide to good practice. Fraud and Risk Management Working Group. Ernest, K & Young, P., (2003). Fraud, the Unmanaged Risk. Retrieved May 2, 2013 from, Fraud Advisory Panel, (2006). Approaches to fighting Fraud. A practical guide for Small Medium Enterprises (SME’s), 2nd Edition. CIMA. Helenne, D., (2008). Fraud Risk Management, 2nd edition. A Guide to Good Practice. CIMA Innovation and Development. Institute of Business Ethics, (2003). Promoting effective Code of Business Ethics. Providing guidance to best practice using the IBE Illustrative Code of Business Ethics. Retrieved May 2, 2013 from, KPMG Forensic, (2006).Fraud Risk Management. Developing a strategy for prevention, detection and response. Retrieved May 2, 2013 from, Turner, C., (2007), Fraud risk management: a practical for accountants. Corporate Fraud-CIMA. Wells, J., (2007), The Corporate-wide fraud handbook on prevention and detection, 2nd ed. Hoboken. John Wiley and Sons. Read More