0:00:08.033,0:00:14.000
So we’ve looked at what fraud is, why it
happens, and touched on how it can happen.
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In the lesson, we take a very important next
step which is to better understand how to
prevent and detect fraud,
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which will round out your understanding of how
opportunity can be minimized.
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We’ve talked in earlier lessons of internal control
about the importance of establishing entity level
controls and strong corporate governance.
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Stopping fraud really starts here.
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Fraud prevention and detection is a
management responsibility.
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Management and the board of directors are
responsible for setting an ethical tone at the top,
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which establishes the acceptable ethical
behaviors of the organization.
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This should a code result in a code of ethics
and/or a fraud policy which makes it explicitly
clear...
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what is expected of the employee and the
repercussions of any fraudulent activity.
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But obviously, this is just a first step as
management needs to walk the talk as well.
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Research has shown that the creation of a
positive workplace helps to mitigate the
rationalization condition we talked about earlier,
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which often arises when employees feel
threatened, abused or ignored.
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An important part of creating and maintaining
this positive work environment is providing
employees with a safe outlet to voice concerns.
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The best way to enable this is to set up a
whistle blower hotline for employees to report
their concerns on an anonymous basis.
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Obviously trying to hire employees that are
honest is important,
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which requires effective screening policies and
extensive background checks.
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Employees should be trained in the company’s
expectation of ethical conduct as well as in
basic fraud awareness techniques,
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such as those you are presently learning.
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The number one way in which frauds are
detected is through tips received.
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Enabling the employees can be the company’s
best line of defense.
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To reinforce the ethical culture, the company
may have the employees reconfirm annually
their compliance with the code of conduct.
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When allegations of fraud arise, its important
that the company should be diligent in
investigating and responding.
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This will send a clear message to all employees
that fraud is not tolerated.
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Management should also approach fraud risk
management with five principles in mind.
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First, management must clarify its expectations
of fraud risk in a written policy.
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Second, management must assess where the
organization has fraud risk exposure.
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This would include the areas we discussed in
the fraud schemes we discussed in our first
lesson in this module.
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Third, management should establish control
activities to mitigate fraud risks.
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These may be company wide controls, such as
an ethics policy and fraud awareness training,
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or they may be specific to a particular area of
risk, such adequate segregation of duties over
cash.
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Fourth, in addition to prevention controls,
detection controls should be implemented.
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Detective controls could include having that all
important whistle blower hotline,
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or having internal audit perform audits of high-
risk areas,
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or initiate special investigations of unusual
activity.
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And lastly, communication, reporting, and
monitoring of the fraud assessment should be
ongoing and continuous.
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Internal audit often plays an important role to
evaluate whether the fraud controls are operating
efficiently and effectively.
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There must mechanism in place to ensure that
findings are funnelled up the organization,
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even to the audit committee as indications of
fraud arise, regardless of materiality.
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As chairman of the audit committee, tips
submitted through the hotline at the company
I’m involved with come directly to me.
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The audit committee has important oversight
role to play.
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The committee oversees management’s fraud
risk assessment as well as the antifraud
programs and controls they implement.
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The audit committee reinforces the all-important
tone at the top and discusses matters directly
with the internal audit function,
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in the absence of management, to prevent any
interference.
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The audit committee has the authority and
resources at its disposal to investigate any fraud
allegations.
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Note that we haven’t said much about the
external auditor’s role in the prevention or
detection of fraud.
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The reason for this is that research has shown
that the external audit is not all that effective at
detecting frauds.
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This may come as surprise to many directors,
executives, and shareholders,
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who implicitly believe that fraud detection is
implicit in an audit.
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However, detecting transactions that have been
intentionally concealed and possibily immaterial
can be very difficult for the auditors.
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But with that said, the auditors are by no means
exonerated from considering fraud during the
performance of the audit,
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as well will learn in our next lesson.
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Until then, don’t stop until you get to the top and
when you get to the top, don’t stop.