BKAA3013 FORENSIC ACCOUNTING

SEMESTER A 182

TOPIC 2:
FRAUD PREVENTION

NOR ZALINA MOHAMAD YUSOF

11 & 14 MARCH 2019
 LEARNING OBJECTIVES
At the end of this topic, you should be able to:
• Understand how to create a culture of honesty,
openness, and assistance.
• Know how to eliminate opportunities for fraud.
• Understand how to create an effective
organization to minimize fraud.
• Understand the importance of proactive fraud
auditing.
• Understand the importance of creating a
comprehensive approach to fighting fraud.
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Just About Everyone Can Be Dishonest

• It would be nice to believe that most

individuals and employees are so honest that
they would never commit fraud.
• Unfortunately, most people are capable of
committing fraud, and most people adapt to
their environments.
• When placed in an environment of low
integrity, poor controls, loose accountability,
or high pressure, people tend to become
increasingly dishonest.
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 Creating a Culture of Honesty, Openness, and
Assistance

• Three major factors in fraud prevention relate to

creating a culture of honesty, openness, and
assistance.
• These three factors include:
– Hiring honest people and providing fraud awareness
training
– Creating a positive work environment, which means
having a well-defined code of conduct, having an
open-door policy, not operating on a crisis basis, and
having a low-fraud atmosphere
– Providing an employee assistance program (EAP)
that helps employees deal with personal pressures
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Creating a Culture of Honesty, Openness,
and Assistance—Illustration

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 Verify Applicant’s Résumé and
Application
• Verify all information on the applicant’s
résumé and/or application using the following
suggestions:
– Require all applicants to certify that all information
on their application and/or résumé is accurate
– Train those involved in the hiring process to
conduct thorough and skillful interviews
– Use industry-specific or other approaches as
deemed necessary (credit checks, fingerprinting,
drug tests, public record searches, honesty tests,
etc.)
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Hiring Policies and Practices

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 Creating a Positive Work Environment

• Create a positive work environment,

making the organization less vulnerable to
fraud, by
– Creating expectations about honesty through
having a good corporate code of conduct and
conveying those expectations throughout the
organization
– Having open-door or easy access policies
– Having positive personnel and operating
procedures
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 Implementing Employee Assistance
Programs (EAPs)

• Help employees deal with:

– Substance abuse
– Gambling
– Money management
– Health, family, and personal problems

• Provide support systems with programs like:

– Wellness
– Team building
– Coaching
– Conflict resolution
– Critical incident response
– Assessment
– Counseling
– Referral

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Eliminating Opportunities for Fraud to Occur

• Five methods of eliminating fraud opportunities:

– Having good internal controls
– Discouraging collusion between employees and customers
or vendors and clearly informing vendors and other outside
contacts of the company’s policies against fraud
– Monitoring employees and providing a hotline (whistle-
blowing system) for anonymous tips
– Creating an expectation of punishment
– Conducting proactive auditing

• Each method reduces either the actual or the

perceived opportunity to commit fraud.

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 Having a Good System of Internal Controls

• Committee of Sponsoring Organizations’

(COSO) definition of an internal control
framework includes the following elements:
– Good control environment
– Risk assessment process
– Set of control activities
– Information and communication system (including the
accounting system)
– Process of monitoring compliance with the controls

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 Good Control Environment -
COSO
• Control Environment
1. The organization demonstrates a commitment to integrity and
ethical values.
2. The board of directors demonstrates independence from
management and exercises oversight of the development
and performance of internal control.
3. Management establishes, with board oversight, structures, reporting
lines, and appropriate authorities and responsibilities in the
pursuit of objectives.
4. The organization demonstrates a commitment to attract, develop,
and retain competent individuals in alignment with objectives.
5. The organization holds individuals accountable for their internal
control responsibilities in the pursuit of objectives.
 Risk Assessment Process -
COSO
• Risk Assessment
6. The organization specifies objectives with sufficient clarity to enable
the identification and assessment of risks relating to
objectives.
7. The organization identifies risks to the achievement of its objectives
across the entity and analyzes risks as a basis for
determining how the risks should be managed.
8. The organization considers the potential for fraud in assessing risks
to the achievement of objectives.
9. The organization identifies and assesses changes that could
significantly impact the system of internal control.
 Control Activities - COSO
• Control Activities
10. The organization selects and develops control activities that
contribute to the mitigation of risks to the achievement of
objectives to acceptable levels.
11. The organization selects and develops general control activities
over technology to support the achievement of objectives.
12. The organization deploys control activities through policies that
establish what is expected and procedures that put policies
into action
 Control Activities
• Segregation of Duties
– Having two people do a task together or splitting the task into parts so
that no one person handles the complete assignment
• Authorizations
– Having a system of proper authorizations so that only authorized or
designated individuals have permissions to complete certain tasks
• Physical Controls
– Implementing physical safeguards such as locks, keys, safes, fences,
and so on, to prohibit access to assets and records
• Independent Checks
– Implementing a system of independent checks such as job rotations,
mandatory vacations, audits, and so on
• Documentation
– Having a system of documents and records that provide an audit trail
that can be followed to check on suspicious activity and to document
transactions

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Discouraging Collusion between Employees
and Others

• Approximately 29 percent of frauds involve

collusion
• Ways to discourage fraud involving
collusion
– Use periodic letters to explain policies to
vendors
– Include a “right-to-audit” clause on all
purchase invoices

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 Monitoring Employees and Having a
Whistle-Blowing System

• Close monitoring
– Facilitates early detection
– Deters frauds because potential perpetrators realize
that “others are watching”
• A good whistle-blowing program is one of the most
effective fraud prevention tools.
– Approximately 33 percent of all frauds are detected
through tips.
– Section 806 of the Sarbanes-Oxley Act of 2002
requires all public companies to have a whistle-blower
system.
– Government agencies and some foreign companies
have whistle-blower systems.
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 Elements of an Effective Whistle-
Blowing System
• Anonymity
• Independence
• Accessibility
• Follow-up

18 CHAPTER 4
 Creating an Expectation of Punishment

• Fear of punishment
• Examples of punishment
– Termination—not always a real punishment
– Having to disclose dishonest behavior to family and
friends
– Prosecution
• Expectation of punishment can be conveyed by
– Having a policy that states employees who engage in
fraud will be prosecuted to the fullest extent of the law
– Applying the policy
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 Conducting Proactive Fraud Auditing

• Good fraud auditing involves four steps:

– Identify fraud risk exposures
– Identify the fraud symptoms of each exposure
– Build audit programs to proactively look for
symptoms and exposures
– Investigate fraud symptoms identified

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 Preventing Fraud—A Summary

• Fraud is reduced and prevented by

– Creating a culture of honesty, openness, and
assistance
– Eliminating fraud opportunities

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Figure 4.3 Fraud Prevention

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A Comprehensive Approach to Fighting
Fraud

• Many companies do NOT have a

comprehensive approach to fighting fraud.
– Responsibility for fraud in an organization is
often seen as belonging to “someone else.”
– A “non-ownership” attitude regarding fraud is
common.

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Organizations and Fraud—The Current
Model
• The current model that many organizations use for
dealing with fraud is characterized by four stages:
– Fraud incident
– Investigation
– Action
– Resolution
• Once these four stages are completed, no further
action is taken—until another fraud occurs.
– Fraud will never decrease with this model.
– Fraud will become a recurring problem.

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Dealing with Fraud:
The Current (Default) Model

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 Elements of Fraud-Fighting Model

• Element 1: Positive tone at the top

• Element 2: Education and training for employees
and others about the seriousness of fraud and informing
them what to do if fraud is suspected
• Element 3: Integrity risk assessment and having a
good internal control system
• Element 4: Reporting and monitoring system
• Element 5: Proactive fraud detection methods in
place
• Element 6: Effective investigation and follow-up
when fraud occurs
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Sound Organizations—Minimal Fraud

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