Fraud Management & Control
Fraud Management & Control
A business can be impacted by fraud in many areas, including accounting, finance, production, and even the executive suite. The cost impact variation is significant, ranging from a few percentages on sales loss to potentially bankrupting the business. To the surprise of most people, fraud is very common in most companies across different countries. Our experience suggests fraud does not discriminate, it could occur in companies of many sizes, and cultures, and some even in companies with strong ethical standards. The losses suffered as a result of fraud are significant, estimated at approximately 3% to 5% of sales on average according to research. Attributable to the inordinate cost of financial loss coupled with the rapid increases in fraud rate, especially in recent years with high inflation and even stagflation in some countries, we noted fraud prevention and detection have become a common function in most companies. Although it is not possible to fully eradicate fraud, minimizing corporate fraud will benefit the company in many ways, including a healthy profit margin, more effective corporate resources allocation, and offering of competitive market prices which in turn gives the company a long-term market competitive edge over its competitors.
Our teams specialize in assisting the company in identifying different types of fraud and upon which, constructing an environment to minimize fraud. In addition, our team further specializes in setting up indicators of fraud along with relevant policies and procedures to detect fraud at the earliest possible time. Certain aspects on scopes of our service provisions are summarized as follows:
Fraud Prevention
In most organizations, the typical pattern of handling a fraud case generally consists of four steps:
Step 1: fraud discovering
Step 2: Investigating the discovered fraud
Step 3: Initiate the relevant actions towards handling the specific fraud case. This may include terminating the contract of a specific employee, ceasing business dealing with a specific supplier or customer, etc.
Step 4: Correct the existing control system towards preventing similar fraud cases from happening
Unfortunately, there are many downsides to this approach and the same level or category of fraud is likely to happen again shortly. The primary reason for this effect is that the approach does not address the factors that cause fraud. As a result, the exact type of fraud may be eliminated with the new improved control but fraud risks remain present. Our team adopts a different approach to dealing with fraud which targets addressing the primary factors that cause it. From our experience, if the recommended system encompassing the approaches is installed properly, this alternative system will create a different environment that strongly discourages employees from even considering engaging in fraud. In other words, more weight on our service scope will be placed on the psychological aspect of fraud instead of mere specific fraud identification and control procedures.
Some highlights on the core aspects of our service. A combination of three factors was needed for an employee to commit fraud – Perceived Pressure, Opportunity, and Rationalization. The relevant fraud system in most organizations only focuses on the Opportunity factor. However, our team will assist the company in reducing the effects of all three factors as it shall significantly reduce the corporate fraud rate, and with sustainable long-term effects. Furthermore, to the feedback from managements of various typical organizations in dealing with frauds, managements are scaling down on typical fraud preventive activities as it is not cost-effective to do so, and most of all, the preventive activities have minimal impacts in reducing frauds since the certain employee will commit fraud regardless of the preventive measure. Therefore, towards resolving this problem, it is our team’s motto to provide practical and spot-on advice to prevent the opportunity for people to commit fraud, whilst addressing the factors of perceived pressure and rationalization.
Fraud Policies and Controls
Fraud policies and controls are crucial and need to be in place to prevent employees from committing fraud. In other words, the set of controls and policies are catered specifically to the fraud prevention aspect. It is without a doubt the relevant fraud policies and controls must be in place, but one key aspect which often ignored by most organizations is the adequacy of these controls. How much is enough and what constitutes an adequate set of controls? Answers to the adequacy aspect of the controls vary from company to company and it depends largely on the business’s needs. For example, organizations that place more weight on achieving more efficiency in their operations are likely to scale down on the set of fraud controls and policies. On the contrary, organizations that target to minimize fraud or create a fraud-free environment may opt for an additional set of fraud controls and policies which naturally will lower the efficiency of its operation in line with additional fraud deterrent procedures. From our experience, it is highly complex and difficult for our team to advise on the correct set of control mix since the needs for balancing fraud deterrent objectives with operation efficiency are difficult to determine in the first place and these needs varied over time. Alternatively, our team could share with the management of the company a set of a selection of those controls that are most relevant to cater to specific fraud prevention. Management can then decide which sets of controls are the most relevant and necessary upon taking into consideration balancing against operational efficiency and the expectation of fraud minimization, and budget set aside for this fraud prevention purposes. In addition, our team will further propose several corporate policies that can be useful for fraud deterrence, ranging from annual audit requirements to establishing a whistleblowers reward program.
Fraud Detection
A complete set of control in fraud prevention provides an effective solution for minimizing fraud but a preventive mechanism alone does not provide an absolute solution. Detection controls support preventive measures via spotting fraud at the earliest time possible, and normally before it has begun. It is important for the management of the companies to understand and recognize fraud will never be a one-time event and that its recurrence in the future is highly possible. It will be more likely for employees to commit fraud if there is an absence of a fraud detection mechanism to identify fraud after it has begun to occur. Our team could assist with providing advice on the broad array of fraud symptoms that can be spotted, the data analysis techniques in the course of spotting fraudulent or suspicious transactions, and several related aspects.
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