FRAUD AND IRREGULARITIES
ONYEMA CHUKWUEMEKA COLLINS
Fraud is a deliberate act (or failure to act) with the intention of obtaining an unauthorized benefit, either for oneself or for the institution, by using deception or false suggestions or suppression of truth or other unethical means, which are believed and relied upon by others. Depriving another person or the institution of a benefit to which he/she/it is entitled by using any of the means described above also constitutes fraud.
Examples of fraudulent acts include, but are not limited to, the following:
- Forgery or alteration of document.
- Unauthorized alteration or manipulation of computer files.
- Fraudulent financial reporting.
- Misappropriation or misuse of University resources (e.g., funds, supplies, equipment, facilities, services, inventory or other assets).
- Authorization or receipt of payment for goods not received or services not performed.
- Authorization or receipt of unearned wages or benefits.
- Conflict of interest, ethics violations.
WHAT IS IRREGULARITIES?
An irregularity is an entry or statement that does not conform to use the normal laws, practices and rules of the accounting profession, having the deliberate intent to deceive or defraud. Accounting irregularities can consist of intentionally misstating amounts and other information in financial statements, or omitting information required to be disclosed. Accounting irregularities are commonly distinguished from unintentional mistakes or errors.
Accounting irregularities are often committed as a means to an end, for example assets misappropriations may be concealed by using irregular accounting entries and profit overstatements may inflate the year end bonuses to perpetrators.
ELEMENTS OF FRAUD
- False and Willful representation or Assertion: To constitute fraud there must be some representation or assertion, which is untrue. In the absence of representation or assertion except in the following two cases, there can be no fraud.
- Where silence may itself amount to fraud, and
- Where there is active concealment of facts
The person making the representation should not believe it to be true, otherwise he/she will not be guilty of fraud. Moreover, to constitute fraud, the false representation must have been made willfully or intentionally.
- Perpetrator of Representation: The false representation or misstatement must have been made by a party to the contract or by anyone with its connivance, or by its agent.
- Intention to deceive: Intention to deceive the other party is the essence of fraud. In order to commit a fraud, a person asserts or misstates the fact with the intention that it should be acted upon. As a matter of fact, misrepresentation elevates to fraud when it is prefixed by the element of intention to deceive the other party. For example, A, intending to deceive B, falsely represents that 1,000 tons of sugar is produced annually at his factory, although A is fully aware that only 600 tons of sugar can be produced annually. B ° thereby agrees to buy the factory. A has resorted to fraud to obtain the consent of B.
- Representation must relate to a fact: The representation made by the
party must relate to a fact, which is material to the formation of the contract. A mere statement of opinion, belief, or commendation cannot be treated as fraud. For instance, A states that the detergent produced at his factory washes whiter than whitest. The statement made by A is merely a commendation of the product and not a fact. But if A describes the ingredients, which the detergent contains, it becomes a statement of fact. And if that is found incorrect it amounts to fraud provided A does not believe it to be true.
- Active concealment of facts: ‘Active concealment’ must be distinguished
from ‘passive concealment’. Passive concealment implies mere silence as to material facts, which barring a few cases, does not amount to fraud. Whereas, active concealment results in when the party takes positive or deliberate steps to prevent information from reaching the other party and this is treated as fraud. For example, A sells a horse to B in an auction despite knowing that the horse is unsound. A says nothing to B about the horse’s soundness. This is a case of passive concealment of fact and cannot tantamount to fraud.
- Promise made without intention of performing it:
If a person while entering into a contract has no intention to perform his/her promise, there is a fraud on his/her part, for the intention to deceive the other party is there from the very beginning. For example, an English merchant appointed an Indian woman as his personal secretary and promised that he would marry her. Later she came to know that he was already married and had made the promise without any intention to perform it. It was held that she could avoid the contract on the ground of fraud.
On similar count, a purchase of goods without any intention of paying the price is a fraud and the contract can be avoided on this ground.
- Representation must have actually deceived the other party:
The representation made with the intention to deceive must actually deceive. The party, induced by fraudulent statement, must have relied on it to accord its consent. Thus, an attempt to deceive does not amount to fraud until the other party is deceived thereby. A case in point is the following example. A had a defective cannon. With a view to conceal the defect, he put a metal plug on it. B without examining it bought it. The cannon burst when used by B. B refused to pay the price and accused A of fraud. It was held that B was bound to pay because he was not actually deceived, as he would have bought the cannon even if the deceptive plug had not been inserted.
- Any other act fitted to deceive: The expression ‘any other act fitted to deceive’ obviously means any act, which is done with the intention of committing fraud. This category includes all tricks, dissembling, and other unfair ways, which are used by cunning and clever people to cheat others. For example, a husband persuaded his illiterate wife to sign certain documents telling her that by the papers he was going to mortgage her two plots of land to secure his indebtedness. But, in fact, he mortgaged four plots of land belonging to her. This was held as an act done with the intention of deceiving the wife.
- Any such Act or omission that the law specially declares as void: This category includes the act0 or omission that the law specially declares to be fraudulent. For example, the Insolvency Act and the Companies Act declare certain kinds of transfers to be fraudulent. Similarly, under the Transfer of Property Act, the transferor of real estate is bound to disclose to the transferee the following details:
Material defects, if any, in the property such as, cracks in the wall or in beams, and/or
Any defect or dispute as regards transferor’s title, such as property is subject to encumbrance, i.e., mortgaged or is subject to some dispute pending in a court of law. An omission to make such disclosure on the part of transferor amounts to fraud.
- Party mislead must have suffered some loss: The party deceived must have suffered some loss because as a general rule there can be no fraud without damage and there can be no damages without an injury. The damage or injury may be some loss in terms of money or money’s worth or some other detriment, which can be assessed with ease.
THE ROLE OF FORENSIC AUDITOR IN FRAUD AND IRREGULARITIES DETECTION
Forensic accounting involves the process of understanding, identifying, detecting and communicating fraud patterns and schemes to stakeholders to aid any investigation process or activity which can be attested in the court of law. Accounting standards allow managers to exercise discretion in financial reporting. However, there are concerns that managerial discretion can be abused and could be used to engage in, and to hide fraudulent practices. Hence, the need for forensic accounting. Nonetheless, the quality of any forensic activity would require the fraud expert or investigator to be knowledgeable on how perpetrators engage in fraud, how it manifests, how it is disguised and how to detect fraud. Motivated by this concern, this review examines prior studies on forensic accounting and draw implications for academic research and for policy. Forensic accounting academics emphasize the need for forensic accounting education. However, little is known about whether forensic accounting education has unintended consequences. Further, this review addresses a thought-provoking issue on whether all fraud cases should be given equal investigative priority. Just as medical doctors do not consider all illness to be life-threatening and, therefore, do not commit significant resources (or the same amount of resources) to each category of illness. Similarly, using this analogy, it is easy to understand why regulators react differently to several reported fraud cases. Finally, this review makes a contribution to the forensic accounting literature.
Define Fraud ‘Financial statement fraud is a deliberate attempt by corporations to deceive or mislead users of published financial statements, especially investors and creditors, by preparing and disseminating materially misstated financial statements’ (Rezaee, 2005: 279). An extensive literature on fraud exists (e.g. Apostolou et al, 2000; Rezaee, 2005; Ozkul and Pamukcu, 2012, etc.). Jointly, the literature show some consensus that fraud involves:
(1) The alteration or manipulation of material financial records, supporting
documents, or business transactions;
(2) Intentional misstatements, omissions, or misrepresentation of events,
transactions, accounts or other significant information from which financial statements are prepared;
(3) Deliberate misapplication and misinterpretation of accounting standards, principles, policies and methods used to measure, recognize, and report economic events and business transactions;
(4) Intentional omissions and disclosures or presentation
(5) The use of aggressive accounting techniques such as illegitimate earnings management strategies; and
(6) The manipulation of accounting practices under rule-based or principle-based accounting standards that allow companies to hide the economic substance of their performance.
Fraud schemes vary in scope, context and with the position of the perpetrators within the firm. Some types of fraud are specific to some industries due to industry-related incentives (e.g. Calavita et al, 1997). For example, securities and investment fraud is common to the banking and financial services industry. Other types of fraud are concentrated within top and middle management levels (e.g. Crumbley, 2003; Zahra et al, 2005; etc.).
Other type of fraud committed by employees include:
- creating fictitious expenses and obtaining disbursements,
- creating ghost employees and receiving their wages or salary,
- creating ghost suppliers and receiving their payments,
- benefiting from overstated personal expenditure, etc.,
According to International Journal of Accounting and Economics Studies (Ozkul and Pamukc, 2012). Fraud involving accounting numbers often manifest by directing manipulating accounting numbers used to generate financial reports, for example, inventory overvaluation and improper capitalization of capital expense (e.g. Harris & Brown, 2000; Messmer, 2004), earnings management (e.g. Healy and Wahlen, 1999), income smoothing (Ahmed et al, 1999; Curcio and Hasan, 2013; Ozili, 2015, etE
The Fraud Triangle Compensation Incentives/Pressure Personal needs, social needs, economic needs and the need to meet compensation-based targets provide some incentive to commit fraud. There is evidence that the use of incentive systems increases the likelihood to commit fraud among managers. For example, Johnson et al. (2003) found that compensation pressures, and incentives are significantly associated with firms that have a fraud history. Similar evidence was documented by Denis et al. (2005). Hernandez and Groot (2007) find some association between the use of incentive systems and fraud risk. Specifically, they examined auditors’ perspective on incentives that increase the likelihood to commit fraud. They identified senior management unethical attitudes, use of incentive systems and dishonest communications as important indicators of the likelihood to commit fraud or fraud risk. Efendi et al. (2007) found that the likelihood of misstating financial statement increases when the CEO has a sizable amount of stock options and when firms are constrained by debt covenants. Other evidence for incentive-related fraud include: Lie (2005) and Burns and Kedia (2006). In contrast, Erickson et al. (2000) examined the association between equity incentives and financial statement fraud. After examining firms that were accused of fraud during the 1996-2003 period, they found no association between equity incentives and accounting fraud. These conflicting results seem to suggest that not all type of compensation system motivate managers to commit fraud. Therefore, there is a need for future research to identify specific incentives that motivate managers to engage in fraud and those incentives that de-motivate managers to commit fraud. Opportunities When the incentive to commit fraud exists, the perpetuator will seek an ‘opportunity’ to perform the fraudulent act. There is a consensus in the literature that the opportunity to commit fraud is more likely when there are ineffective monitoring and control systems (e.g. Beasley, 1996; Albrecht and Albrecht, 2003; etc.), particularly, when there are fewer independent board members (e.g. Beasley, 1996; Dechow et al. 1996; McMullen and Raghunandan, 1996; Farber, 2005), fewer audit committee meetings and fewer financial experts on the audit committee (e.g. Abbott et al.2004; Farber, 2005; etc.). Beasley (1996) finds that the proportion of independent members on the board of directors is lower for firms that engage in fraud practices relative to non-fraud firms. Evidence from these studies suggests that lesser monitoring creates opportunities for fraud to be committed.
Rationalizations: Rationalization is the third component of the fraud triangle. When fraud perpetrators have some incentive and find an opportunity to commit fraud, the perpetrator will seek explanations to justify their actions. Some justification includes claiming that: ‘I borrowed the money’; ‘I would pay back’, ‘nobody has suffered as a result of this’, ‘I didn’t know it was a crime’, etc. (refer to: Ozkul and Pamukcu, 2012; 24). Overall, in the literature there is a consensus that there are some relation between incentives, opportunities, and rationalization. Nonetheless, there is no agreement on the order or sequence of occurrence for each component of the fraud triangle. Therefore, future research should attempt to establish a systematic and logical sequence between incentives, opportunities, rationalization and capabilities while at the same permitting inter-dependence among each component of the fraud triangle. Fraud Polygon Several studies have made attempts to expand the fraud triangle. Wolfe and Hermanson (2004) expanded the fraud triangle by adding a fourth dimension to the triangle which they termed the ‘fraud diamond’. The fourth dimension is ‘capability’. According to Wolfe and Hermanson (2004), ‘capability’ addresses the reality that some people will not commit fraud even if all three original factors are strongly present. The perpetrator must have the capability to commit the fraudulent act with some confidence that it will go undetected. Also, Rezaee (2005) present an alternative to the fraud triangle as an attempt to identify potential causes of fraud. Rezaee (2005) investigated factors that may increase the likelihood of committing fraud by equating fraud tendencies to a concept he termed – CRIME where “C” stands for Cooking the books, “R” for Recipes, “I” for Incentives, “M” for Monitoring or lack of it, and “E” for End Results. Rezaee (2005) concluded, based on his CRIME analysis, that financial statement fraud is a serious threat to investors’ confidence in financial information. More recently, Kranacher et al (2010) formulated their “MICE” approach to explain the motivation (fraud) to commit fraud. According to Kranacher et al (2010), MICE – Money, Ideology, Coercion, and Ego/Entitlement are motivations to commit fraud. In their analysis, they maintained the structure of the fraud triangle but used a co-joined triangle similar to the fraud diamond. Following prior studies, there are prospects that future academic research and emerging sophisticated fraud cases in the near future would improve our understanding of fraud and, thus, expand the fraud triangle and fraud diamond further. This new dimension is the fraud polygon. The idea behind the fraud polygon is to establish a systematic and logical sequence among newly emerging motivations to commit fraud while at the same permitting interdependence among each motivation.
Forensic Accounting Perspectives Bolgna and Linquist (1995) defined forensic accounting as the application of financial skills and investigative mentality to unresolved issues, conducted within the context of the rules of evidence. Forensic accounting involves the application of accounting and auditing, financial and investigative skills, to unsettled issues, conducted within the context of the rules of evidence (see. Arokiasamy and Cristal-Lee, 2009; Ozkul and Pamukc, 2012). Following this definition, the focus of forensic accounting is to identify and review fraudulent transactions to identify the real intent of the perpetrator. Such review may take the form of document reviews, interviews, examination of electronic documents, etc. From an auditor’s perspective, forensic accounting deals with the application of auditing methods, techniques or procedures to resolve legal issues that require the integration of investigative, accounting, and auditing skills (Arokiasamy and Cristal-Lee, 2009; Dhar and Sarkar, 2010). From the perspective of an attorney or a litigator, forensic accounting involves gathering, interpreting, summarizing and presenting complex financial issues in a clear, succinct and factual manner often in a court of law as an expert (Howard and Sheetz, 2006; Stanbury and Paley-Menzies, 2010). Such forensic evidence must meet standards required by courts of law and be presented in a manner that will be accepted by a court of jurisprudence. From the perspective of a fraud examiner, forensic accounting is the application of investigative and analytical skills to resolve International Journal of Accounting and Economics Studies 65 financial issues in a manner that meets standards required by courts of law (Hopwood et al, 2008).
Overall, forensic accounting investigation will involve the services of the informed auditor, attorney and fraud examiner.
SKILLS AND EDUCATION OF THE FORENSIC INVESTIGATOR
Skills In this section, I classify the skills of the forensic investigator into two categories: core skills and enhanced skills. This categorization is similar to Davis et al. (2010)’s classification.
Core Skills: Core skills are skills considered to be fundamental to become a forensic investigator. For example, Messmer (2004) identified strong analytical abilities, written and verbal communication skills, creative mind-set and business acumen. Durkin and Ueltzen (2009) stress that the forensic investigator should possess the knowledge of
- professional responsibilities and practice management;
- laws, courts and dispute resolution;
- Analytical abilities to do the work
STATEMENT OF OBJECTIVE
- To understand the concept of fraud and irregularities
- To the effect of fraud and irregularities
- To study the extent to which the incidents of fraud could be reduced to the nearest minimum
- To understand the challenges that might be encountered in an attempt to reduce fraud in a system.
- To proffer solutions to the challenges likely to be encountered in an attempt to reduce fraud.
FACTORS THAT INFLUENCE FRAUD ACTIVITIES
The factor triangle is a well used model to help explain why individuals may commit fraud. It suggests that the following are key factors.
Opportunity: Opportunity is generally provided through weaknesses in the internal controls such as lack of segregation of duties. What is means is that some individuals will not commit fraud until they have the opportunity to do so. Management in all ramifications need to be aware of this and therefore close up every single opportunity that will induce fraud in their organization.
Pressure: the individual is under some pressure. This may be personal financial pressure or fierce addiction. Here people or corporate organizations go into fraud due to pressures to meet certain demands or performance level.
Rationalization: the individual can rationalize and justify the fraudulent behavior in their mind. This may belief that they will pay the fund back or they have been working hard and are due for compensation.
TYPES OF FRAUD AN IRREGULARITY
- Financial statement fraud
Although it’s less common, financial statement fraud can be the most damaging to a company. Overstating revenue, earnings, and assets – along with understating liabilities (or just plain concealing them) – are the most common activities found with this type of fraud. Enron and WorldCom are two semi-recent, high-profile cases involving financial statement fraud.
- Asset misappropriation: Some of the more common types of fraud fall into the
category of asset misappropriation, which closely-held businesses are most susceptible to.
- Skimming of cash and cash larceny: This type of asset misappropriation consists of taking cash before it even enters the company’s accounting system. It’s very hard to uncover because it requires finding evidence of something that hasn’t been recorded yet. And, it doesn’t require a lot of sophistication to execute, making it a popular choice among those that commit fraud. Examples of asset misappropriate include, check tampering, accounts receivable skimming, fake billing schemes, payroll schemes, fake or duplicate expense reimbursement schemes, and inventory schemes.
- Misuse of company assets: Another common type of asset misappropriation is the misuse of company assets. Not only is it problematic since it’s the unauthorized use of company assets, but it can also open up the company to significant liability.
- Theft of intellectual property and trade secrets: As our world becomes
increasingly driven by information and technology, an increase in the theft of
intellectual property and trade secrets is on the rise.
- Healthcare, insurance, and banking: Healthcare, insurance, and banking are all
industries that have billions of dollars flowing through their systems, making them
prime targets for this type of fraudulent activity. Bogus health insurance claims,
business insurance claims, and fraudulent bankruptcies are all ways individuals
commit this type of fraud.
- Consumer fraud: Individuals targeted through cons, bogus telemarketing, email,
Ponzi schemes, phishing, ID theft, and other schemes, are all victims of consumer fraud. Whether it’s an organization system breach or bogus tax returns filed for large refunds, consumer fraud is on the rise. Companies can also be victims of email phishing scams – especially spear phishing, which involves sending targeted, disguised emails that contain malicious links.
SIGNS IN FINANCIAL RECORDS THAT MAY INDICATE FRAUD
- An income in stock or equipment going missing or being written off.
- Missing documents to support transaction or contracts.
- Multiple payments and duplicate payments
- Frequent customer complaints bout an employee or service, eg the goods or service received is less than what was requested or payment are required in cash.
- Excessive adjustment or corrections through the ledger.
BEHAVIOR THAT INDICATE AN EMPLOYEE IS INTO FRAUDULENT ACTIVITIES:
- Living beyond their means:
- Getting into financial difficulties or having addiction:
- Not taking leave:
- Rewriting records:
- Being unwilling to share duties:
- Developing inappropriate close relationship with customers and suppliers:
EFFECT OF FRAUD AND IRREGULARITIES IN AN ORGANIZATION
Fraud and irregularities is an unfortunately common enemy of an organization. Organizations/ business of all size can be susceptible to fraud _ a smaller business may be more vulnerable than a larger one as they don’t tend to focus as much effort on fraud prevention.
Fraud can cause problems in business in the following ways:
Most fraud involves directly or indirectly the theft of money whether through actual theft or abuse of time and irregular use of equipment.
The money lost while a fraud is being perpetrated has an obvious effect, but then there’s the costs of ‘clearing up’ after and perhaps instituting fraud prevention measures.
If your business has fallen victim to a major fraud, it can have a detrimental effect in the eyes of your actual and potential customers. There have been various high-profile frauds at major companies that unquestionably tarnished their reputations.
The longer term effects of fraud in terms of loss of goodwill and cold, hard cash in lost business can last well into the future and take considerable hard work to correct.
Accounting and capital
Your costs to audit your accounts could well increase as extra checks may be needed to ensure you’re fully recovered from a fraud episode and your accounting systems are efficient. Attracting funding could be diminished as lenders could be put off by news of recent frauds in your business.
Fraud can have a devastating effect on company morale in various ways:
Culpability : if someone in a team has been discovered conducting fraudulent activities, it’s possible their immediate work colleagues may feel guilty for not detecting anything amiss.
Management fraud :if it’s revealed that management or those in senior positions have perpetrated a fraud, then trust in the organization amongst the workforce at large can be severely diminished.
Trust is important in business, but so too is responsible checking up; a ‘trust and verify’ method is worth pursuing to control staff activities to protect against fraud while not making staff feel they’re considered untrustworthy.
The more companies embrace technology the more the risk of fraud rises; tech has advanced to the point where even the smallest business may have sophisticated IT systems vulnerable to fraudulent activities.
When a fraud is detected or suspected, then it can have a very disruptive effect on the business’s digital activities. In the worst case data could be lost or compromised, new systems may need putting in place to combat the threat or recover once it’s been detected, and maybe a whole new business strategy may be required along with an overhaul of security.
This could involved wholesale staff training and lengthy audits by digital experts possibly causing loss of productivity.
HOW TO PREVENT OR MINIMIZE FRAUD OCCURRENCE
There are ways you can minimize fraud occurrences by implementing different procedures and controls. Which may include:
- Know Your Employees
Fraud perpetrators often display behavioral traits that can indicate the intention to commit fraud. Observing and listening to employees can help you identify potential fraud risk. It is important for management to be involved with their employees and take time to get to know them. Often, an attitude change can clue you into a risk. This can also reveal internal issues that need to be addressed. For example, if an employee feels a lack of appreciation from the business owner or anger at their boss, this could lead him or her to commit fraud as a way of revenge. Any attitude change should cause you to pay close attention to that employee. This may not only minimize a loss from fraud but can make the organization a better, more efficient place with happier employees. Listening to employees may also reveal other clues. Consider an employee who has worked for your company for 15 years that is now working 65 hours a week instead of 40 because two co-workers were laid off. A discussion with the employee reveals that in addition to his new, heavier workload, his brother lost his job and his family has moved into the employee’s house. This could be a signal of potential fraud risk. Very often and unfortunately, it’s the employee you least expect that commits the crime. It is imperative to know your employees and engage them in conversation.
- Make Employees Aware/Set Up Reporting System
Awareness affects all employees. Everyone within the organization should be aware of the fraud risk policy including types of fraud and the consequences associated with them. Those who are planning to commit fraud will know that management is watching and will hopefully be deterred by this. Honest employees who are not tempted to commit fraud will also be made aware of possible signs of fraud or theft. These employees are assets in the fight against fraud. According to the ACFE 2014 Report, most occupational fraud (over 40%) is detected because of a tip. While most tips come from employees of the organization, other important sources of tips are customers, vendors, competitors, and acquaintances of the fraudster. Since many employees are hesitant to report incidents to their employers, consider setting up an anonymous reporting system. Employees can report fraudulent activity through a website keeping their identity safe or by using a tip hotline.
- Implement Internal Controls
Internal controls are the plans and/or programs implemented to safeguard your company’s assets, ensure the integrity of its accounting records, and deter and detect fraud and theft. Segregation of duties is an important component of internal control that can reduce the risk of fraud from occurring. For example, a retail store has one cash register employee, one salesperson, and one manager. The cash and check register receipts should be tallied by one employee while another prepares the deposit slip and the third brings the deposit to the bank. This can help reveal any discrepancies in the collections.
Documentation is another internal control that can help reduce fraud. Consider the example above; if sales receipts and preparation of the bank deposit are documented in the books, the business owner can look at the documentation daily or weekly to verify that the receipts were deposited into the bank. In addition, make sure all checks, purchase orders and invoices are numbered consecutively. Use “for deposit only” stamps on all incoming checks, require two signatures on checks above a specified dollar amount and avoid using a signature stamp. Also, be alert to new vendors as billing-scheme embezzlers setup and make payments to fictitious vendors, usually mailed to a P.O. Box.
Internal control programs should be monitored and revised on a consistent basis to ensure they are effective and current with technological and other advances. If you do not have an internal control process or fraud prevention program in place, then you should hire a professional with experience in this area. An expert will analyze the company’s policies and procedures, recommend appropriate programs and assist with implementation.
- Monitor Vacation Balances
You might be impressed by the employees who haven’t missed a day of work in years. While these may sound like loyal employees, it could be a sign that these employees have something to hide and are worried that someone will detect their fraud if they were out of the office for some time. It is also a good idea to rotate employees to various jobs within a company. This may also reveal fraudulent activity as it allows a second employee to review the activities of the first.
- Hire Trustworthy Experts
Many of the people working for your company, including Certified Fraud Examiners (CFE), Certified Public Accountants (CPA), and CPAs who are Certified in Fraud Forensics (CFF) can all play important roles in establishing antifraud policies and procedures. However, not all of these experts have the experience or the reputation for providing the service that is best for your needs. When hiring accountants, fraud examiners, and other expert professionals who will have access to sensitive company information such as bank account numbers, it is critical to ensure these firms or individuals have reputations built on quality service and trustworthiness. This way, you can feel confident that your forensic analyses, basic financial consulting services, and internal control audits are thorough, and your information will never be compromised.
- Live the Corporate Culture
A positive work environment can prevent employee fraud and theft. There should be a clear organizational structure, written policies and procedures and fair employment practices. An open-door policy can also provide a great fraud prevention system as it gives employees open lines of communication with management. Business owners and senior management should lead by example and hold every employee accountable for their actions, regardless of position.
- Fraud Detection
Detection methods should be in place and be made visible to the employees. According to Managing the Business Risk of Fraud: A Practical Guide, published by Association of Certified Fraud Examiners (ACFE), the visibility of these controls acts as one of the best deterrents to fraudulent behavior. It is important to continuously monitor and update your fraud detection strategies to ensure they are effective. Detection plans usually occur during the regularly scheduled business day. These plans take external information into consideration to link with internal data. The results of your fraud detection plans should enhance your prevention controls. It is important to document your fraud detection strategies including the individuals or teams responsible for each task. Once the final fraud detection plan has been finalized, all employees should be made aware of the plan and how it will be implemented. Communicating this to employees is a prevention method in itself. Knowing the company is watching and will take disciplinary action can hinder employees’ plans to commit fraud.
CHALLENGES ENCOUNTERED IN AN ATTEMPT TO FRAUD#
Cost: When it comes to identifying and preventing risk and potential fraud, returns can be harder to quantify. It a concerns to spend money on a system that might or might not identify fraud. And if the system does identify fraudulent activity, companies are now obligated to spend more for the additional investigation and possible litigation. Larger companies might see money lost to fraud as “pennies” but pennies add up. That’s money that could have been reinvested toward a company’s bottom line.
TECHNOLOGY: Companies are concerned that implementing new software technology might increase their exposure to fraud via data breaches. They’re concerned that technology will replace internal auditors. While data encryption and similar tools can combat the risk of data breaches, addressing personnel concerns are trickier. Technology in any form is a means to assist not replace people. Computers alone don’t discover fraud, they simply detect red flags that can point to the right direction. The red flag could be a simple data entry error or an anomaly within the data. Technology held identify red flags, but human input and investigation is required to determine if fraud is indeed occurring.
LOSS OF REPUTATION: Companies might fear their reputation will take a hit if they uncover ongoing fraud schemes. Social media has evolved to become an incredibly popular form of information sharing, so all it takes is the hint if a rumor and the damage is done. Employees might post information-or alleged information that makes it appear as though a company is attempting to hide something. For that reason, it’s to a company’s advantage to be open with their employees in their efforts to fight fraud. Employees are less likely to whistle blow in public when there are safe, internal options for them to report discrepancies to management.
SOLUTIONS TO CHALLENGES
Risk management is a continuous process. Once a fraud incident is identified, an organization must assess and respond to the occurrence. Then, it should continue to carefully monitor its risks because inaction presents the perfect opportunity for future incidents to occur.
Fraud Risk Assessment
Performing an independent assessment of an organization’s internal controls provides an objective view of procedures and potential vulnerabilities. It’s an effective method of laying a strong foundation for anti-fraud objectives while controlling costs at the same time.
The benefits of a fraud risk assessment are threefold:
Identify emerging or residual fraud risks
Develop a hierarchy for prioritizing risk response
The most common inherent risks an assessment can identify:
Incentives, pressures, and opportunities to commit fraud
Legal or regulatory misconduct, including asset misappropriation
Information technology risks, such as the risk of internal control override
Fraudulent financial reporting
An assessment often causes minimal interference for an organization. The findings can help bolster education and training initiatives for internal resources. There’s also the added benefit of building employee confidence in an organization’s fraud identification approach.
Confidential Reporting Hotline
Fraud losses are found to be 50% smaller at companies when a confidential reporting hotline is in place. Employees, vendors, customers, and clients can use the hotline to make a report when they suspect violations of ethics.
Anti-fraud Management Technologies
Anti-fraud management technologies are effective method for fighting emerging fraud risks.
Data monitoring and analysis help identify trends in data-quality metrics and data values that alert an organization to pre-established rule violations. Continuous monitoring could spot variances from cyclical runs and notice when data exceeds pre-set limits. It can also provide incident notifications and analyze cost quantification for violations.
For example, blockchain technology uses public key encryption, identity authentication, and proof of work methods to create a chronological record of each transaction. This record helps trace the owner of any individual transaction, which discourages employees from committing fraud and makes perpetrators easy to identify.
It’s important for companies to thoroughly vet clients and vendors. As a first step, they may want to ask service providers for their System and Organization Controls (SOC) report, which is an independent report of internal controls. Vendor and client portals can also be valuable tools for automated data validation.
When organizations provide a method to customers and vendors to report suspected violations —such as a confidential reporting hotline—it reinforces the message that they’re serious about fraud prevention.
SUMMARY AND CONCLUSIONS
It is certain that fraud is hereditary in human being and many people do not show this threat until when they are given an opportunity to commit fraud. In view of this, management at all levels both small and big organisations should install adequate, efficient and effective internal control systems in place. This would check make fraud and fish out those who might have perpetrated same where it happened. Here the services of forensic auditor should be employed so that such fraud are investigated and offenders deal with accordingly.
Denis, D. J., Hanouna, P., & Sarin, A. (2006). Is there a dark side to incentive
compensation? Journal of Corporate Finance, 12
Dhar, P., & Sarkar, A. (2010). Forensic Accounting: An Accountant’s Vision.
Vidyasagar University Journal of Commerce,
Efendi, J., Srivastava, A and Swanson, E (2007). Why Do Corporate Managers
Misstate Financial Statements? The Role of Option Compensation and other Factors. Journal of Financial Economics
Durkin, R., and Ueltzen, M. (2009). The Evolution of The CFF Credential,
The Practicing CPA, July/August.
Erickson, M., Mayhew, B.W., & Felix, W.L (2000) Why Do Audits Fail?
Evidence from Lincoln Savings and Loan. Journal of Accounting Research
Farber, D. (2005). Restoring Trust after Fraud: Does Corporate
Governance Matter? The Accounting Review 80 (2):
Groomer, S. M., & Heinz, J. (1994). A survey of advanced auditing courses in
the United States and Canada. Issues in Accounting Education, 9: 91–108 Harris, C. K., & Brown, A. M. (2000). The qualities of a forensic accountant.
Pennsylvania CPA Journal, 71, 2-3.
Healy, P. M., & Wahlen, J. M. (1999). A review of the earnings management
literature and its implications for standard setting. Accounting horizons, 13(4), 365-383.
Hernandez, J. R., and Groot, T (2007) Corporate Fraud: Preventive Controls
Which Lower Fraud Risk. Working Paper, Free University of Amsterdam.
Hogan, C. E., Rezaee, Z., Riley Jr, R. A., & Velury, U. K. (2008). Financial
statement fraud: Insights from the academic literature. Auditing: A Journal of Practice & Theory, 27(2),
Hopwood, W. S., Leiner, J.J., & Young G.R. (2008). Forensic Accounting.
New York: Mcgraw-Hill/Irwin.
Howard, S. & Sheetz, M. (2006). Forensic Accounting and Fraud Investigation
for Non-Experts. New Jersey: John Wiley & Sons Inc.
Lie, E. (2005). On The Timing of CEO Stock Option Awards. Management
Science, 51 (5): 802–812 http://dx.doi.org/10.1287/mnsc.1050.0365.
Mcmullen, D. A., & K. Raghunandan. K. (1996). Enhancing Audit Committee
Effectiveness. Journal of Accountancy 182: 79–81.
Messmer, M. (2004). Exploring options in forensic accounting. National
Public Accountant, 5, 9–20.
Osita Aguolu ( 2018) fundamentals of auditing, SNAAP Press Ltd, 1 Snaap
Drive, Independence Layout. Enugu. Nigeria
Özkul, F. U., & Pamukçu, A. (2012). Fraud Detection and Forensic Accounting.
In Emerging Fraud (Pp. 19-41). Springer Berlin Heidelberg.
Ozili, P. K. (2015). Loan Loss Provisioning, Income Smoothing, Signaling,
Capital Management and Procyclicality: Does IFRS Matter? Empirical
Evidence from Nigeria, Mediterranean Journal of Social Sciences,
Rezaee, Z., Reinstein, A., & Lander, G. H. (1996). Integrating Forensic
Accounting into the Accounting Curriculum. Accounting Education, 1 (2), 147-162.
Rezaee, Z. (2002). Forensic Accounting Practices, Education, and
Certifications. Journal of Forensic Accounting, 3 (2), 207-223.
Rezaee, Z. (2005). Causes, consequences, and deterence of financial statement
fraud. Critical Perspectives on Accounting, 16(3), 277-298.
Rezaee, Z., & Burton, E. J. (1997). Forensic Accounting Education: Insights from
Academicians and Certified Fraud Examiner Practitioners. Managerial Auditing Journal, 12 (9),
Wolfe, D. T., & Hermanson, D. R. (2004). The Fraud Diamond: Considering the
Four Elements of Fraud, The CPA Journal December