Effective Fraud Risk Assessment: Staying
Out of the News
The fundamental foundation of effective
fraud risk management includes assessing processes and procedures
susceptible to fraudsters, identifying the red flags, and promptly
curing and strengthening the breakdowns and weaknesses that exist.
See Related Article |
Occupational Fraud: Recognizing Red Flags and Managing Risk
In the News:
ACFE Report to the Nations on Occupational Fraud and Abuse, the
vast majority (64%) of frauds were committed by individuals working
in one of five departments:
perpetrator has limited or no oversight and unilateral authority to
access cash, inventory or other assets, and/or financial data. The
four highest median dollar losses were in cases involving
executive/upper management ($850,000), board of directors
($360,000), finance ($234,000) and IT ($200,000). Almost 40% of all
fraud is discovered as the result of a tip, and more than 40% of all
tips came from non-employees, such as customers and vendors. Even
though 82% of organizations had external audits of their financial
statements, less than 4% of frauds were detected by external audits.
The lack of effective internal controls was cited as the primary
contributing factor in nearly almost 30% of frauds.
that some industries are more vulnerable to fraud than others, with
the banking and financial services, manufacturing, government and
public administration, and healthcare industries most commonly
Prevention: Where to Start
researching the most common types of fraud in your industry and
assessing what steps your company has taken, if any, to mitigate the
likelihood of occurrence. By performing detailed historical
financial trend analyses and budget-to-actual variance analyses,
unusual operating results can be identified for further
your company’s organizational chart and the direct lines of
authority and oversight helps to determine where weaknesses may
exist in the oversight functions.
the weaknesses and breakdown in internal controls can shed some
light on where potential problems may exist. Ask employees to
explain their processes; more often than not, an open line of
communication with employees helps to identify areas that need
improvement or how procedures are sometimes streamlined resulting in
the circumvention of internal controls.
always a smoking gun when suspicions are raised? Not necessarily.
However, suspicions, unusual activity and behavior, and/or
circumvented internal controls increase the risk that fraud exists
or could occur. Tracing and verifying information internally is a
good start, but, whenever possible, confirmation by outside sources
could mitigate risk in a financial investigation.
Matter of Time
The longer a
fraud scheme goes undetected, the greater the losses. Surveys shows
that payroll fraud, check tampering, financial statement fraud,
expense reimbursements, and billing schemes lasted an average of two
years before being detected. Creating and altering physical
documents were the most common concealment methods.