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The Impact Of Fraud Policy On Fraud Prevention Finance Essay - Free Essay Example

The potential impact of fraud and corruption represents a significant risk to the assets of every organization. According to Abiola (2010) Fraud is currently the most expensive category of crime in the world (p.12). Recent corporate accounting and financial scandals have led to increased legal and regulatory requirements, such as the Sarbanes-Oxley Act of 2002 and the Emergency Economic Stabilization Act of 2008 (EESA). These requirements address internal controls for detecting and deterring fraud. They encourage financial statement auditors to be more aggressive in searching for fraud, and have challenged accountants, corporate governance, and other professionals to conduct fraud risk assessments to mitigate its occurrence. In spite of these regulations, recent events or scandals continue to demonstrate the need for enhanced formal standards and processes of control over risk. The objective of this paper is to assess the role and importance of formal fraud policy in detecting and preventing employee fraud. This study assesses the impact of formal fraud control policies on fraud prevention in public sector organizations. The paper reviews the fraud triangle developed by Donald R. Cressey (1919-1987), and other articles to identify various means employed in perpetrating fraud, and how implantation of formal fraud policies can minimize the incidence of fraud in the various elements of the fraud tri angle. Findings revealed that so many factors contributed to incidence of fraud in public sector organizations amongst which are lack of formal policies on fraud prevention, poor management of fraud policies and procedures; inadequate working conditions; staff staying longer on a particular job, and staff feeling frustrated as a result of poor remunerations. This paper also provides guidelines for public sector organizations desiring to develop fraud prevention policies to minimize the incidence of fraud. Specifically the paper recommends INTRODUCTION Fraud is defined as the intentional misrepresentation, concealment, or omission of the truth for the purpose of deception/manipulation to the financial detriment of an individual or an organization which also includes embezzlement, theft or any attempt to steal or unlawfully obtain, misuse or harm the asset of an organization. (Adeduro, 1998 and, Bostley and Drover 1972) Fraudulent financial reporting can have significant c onsequences for the organization and for public confidence in financial reports. Periodic high profile cases of fraudulent financial reporting raise concerns about the credibility of financial reporting process and call into question the roles of accountants, auditors, regulators, and analysts in financial reporting. According to a report by the Committee of Sponsoring Organizations of the Treadway Commission, in 83% of fraudulent financial reporting cases, either the CEO, the CFO, or both, were associated with financial statement fraud. CFOs alone were implicated in 43% of all cases (Beasley, Carcello and Hermanson 2004. P.24). It is therefore important for organizations to design and implement fraud policy to formalize the development of controls that will aid in the detection and prevention of fraud against the organization. A formal fraud policy will go a long way to promote consistent organizational behavior by providing guidelines and assigning responsibility for the developme nt of controls and conduct of investigations (Albrecht, Romney, Cherrington, Paine Roe, 1981 p.145) Formal organizational fraud policy must cover working practices and business ethics culminating in formally documented procedures. The existence of a formal fraud policy statement indicates that the fight against fraud is endorsed, and supported at the most senior level of management within the business. Because Fraud is extremely expensive, the best way to handle fraud is to take measures to prevent fraud from occurring. Fraud prevention can be achieved by creating the right environment in an organization by making the right hiring choices, and disseminating a well-understood code of conduct; and by implementing policies to eliminate opportunities for fraud by installing a good system of internal controls, with physical control of assets, proper authorizations, segregation of duties and proper documentation. (The Commonwealth Fraud Control Guidelines May 2002) For fraud policy to achieve its purpose, the organization should ensure that all employees are aware of a zero-tolerance attitude to breaches of business practices that constitutes fraud. General procedures for the control should normally involve identification and detection, then lastly management. The fraud policy statement should be communicated to all stakeholders of the organization (Albrecht, Albrecht, and Albrecht 2004 P.134). Each organization should therefore analyze their organizational structure and business risks to identify the various avenues for fraud and implement appropriate policies to minimize the incidence of fraud in these areas. DISCUSSION AND ANALYSIS OF FACTS Fraud is not an openly visible crime. It can be detected only through red flags that indicate that ethics and honesty have been compromised within the company (Beasley and Carcello 1997 P78). Such red flags can be from the accounting system, lack of segregation of duties and other crucial internal control f eatures, lack of integrity in top management behavior, unusual or extravagant behavior on the part of employees. The development and proper implementation of a formal organizational policy on the above issues will therefore go a long way to minimize the incidence of fraud. The Fraud Triangle Donald R. Cressey (1987) developed a hypothesis that explains the conditions that are generally present when fraud occurs in the form of a triangle. This has become known as the fraud triangle Fraud Triangle As can be seen in the figure above, the fraud triangle has three elements. One leg of the triangle represents perceived opportunity. The second leg is perceived pressure and the final leg denotes perceived rationalization. Perceived Opportunity A perceived opportunity to commit fraud and to avoid being punished is the first element of the fraud triangle. Whether the issue is management override, related to a financial statement fraud, or a breakdown in the internal control environment that allows the accounts officers to abscond with the cash and cheque of a business, the perpetrator first perceives the opportunity to commit the fraud. The perpetrators must believe that they can commit the fraud and not get caught; or if he or she gets caught, nothing serious will happen. According to Cressey, opportunities do not have to be real; they only must be perceived as real by the perpetrator. This implies that when it comes to fraud prevention and deterrence, organizations should direct their efforts toward the design and implementation of fraud policies and internal controls aimed at minimizing opportunity for fraud. It must be emphasized, however, that formalization of fraud policies and internal controls are just one eleme nt of reducing opportunity for fraud. According to Wells, 2001, other integral ways to reduce opportunity include providing adequate training and supervision of personnel; effective monitoring of company management by auditors, audit committees, and boards of directors; proactive antifraud programs; a strong ethical culture; anonymous hotlines; and whistleblower protections. Perceived Pressure The second element of the fraud triangle is perceived pressure. Like perceived opportunity, the pressures do not have to be real, they only have to seem real to the perpetrator. According to the Fraud Triangle Hypothesis, many people in any organizational have some access to cash, cheques, or other assets. However, a perceived pressure causes individuals to avail themselves of the opportunity for fraud presented by an internal control weakness. Pressures usually involves a financial need-such as substantial debt, although non-financial pressures, such as the need to report results better than actual performance, work frustration, the need to meet deadlines and cutoffs, or qualifying for bonuses or even a challenge to beat the system. Fraud pressures can also arise from habits such as living beyond ones means, greed, high debt, poor credit management, family medical bills, investment losses, or childrens educational expenses (Wells, 2001, p.32). This implies that organizations that wish to minimize fraud must also design and implement fraud policies that aim at reducing the perceived pressure to commit fraud. Rationalization The third element of the fraud triangle is rationalization. Perpetrators of fraud must find ways to rationalize their illegal acts as being acceptable and, in the process, rationalize away the dishonesty of their acts (Albrecht, Albrecht, Albrecht 2006 p.78). According to Kranacher, 2010, the typical fraud perpetrator has no criminal history and has been with the victim company for some length of time. Because they generally are not habitual criminals and are in a position of trust, they must develop a rationalization for their actions in order to feel justified in what they are doing (P, 4). Rationalizations may include feeling of job dissatisfaction, lack of recognition for a job well done, low compensation, an attitude of they owe me, Im only borrowing the money, nobody is getting hurt, they would understand if they knew my situation, its for a good purpose, or everyone else is doing it. According to Kranacher, 2010 other common rationalizations are: its for the good of the company, the scheme is only temporary, weve no other option, we are not hurting anyone, its for a good purpose, and so on. Several research papers conclude that perceived pressures, perceived opportunities, and rationalizations are essential to every fraud. Whether the fraud is one that benefits the perpetrators directly, such as employee fraud, or one that benefits the perpetrators organization, such as financial statement fraud, the three elements are always present. According to Albrecht, Albrecht, Albrecht (2006), the three elements of the fraud triangle work together so that if more of one factor is present, less of the other factors need to exist for fraud to occur. This implies that, the greater the perceived opportunity or the more intense the pressure, the less rationalization it takes to motivate someone to commit fraud. Likewise, the more dishonest a perpetrator is, the less opportunity or pressure it takes to motivate fraud. Causes of Fraud To be able to implement appropriate policies to address fraud, it is important to clear understand the specific causes of fraud. once the causes are identified, the organization must focus on designing policies to address all the potential causes of fraud. Without a clear understanding of the underlying causes of fraud, fraud policies may just address the symptoms of fraud instead of the root causes of the problem. Causes of fraud can be categorized into institutional factors and environmental/societal factors. Fraud policies must address both internal institutional factors as well as external environmental causes of fraud. Institutional Factors The institutional factor or causes are those that can be traced to internal environment of the organization which are within the control of the management of the organization. The various causes of fraud will influence the elements in the fraud triangle. A major institutional cause of fraud is poor management. This usually comes in the form of inadequate supervision. Employees with fraudulent tendencies who are not adequately supervised would get the impression that the environment is safe for the perpetration of fraud. Poor management would also manifest in ineffective policies and procedures, which a fraudulent minded operator in the system will capitalize on to commit fraud. This implies that poor management increases the perceived opportunity for fraud. Even where effective fraud policies and procedures are in place, fraud could still occur with sometimes deliberate skipping of these tested policies and procedures because of perceived pressure and rationalization. In addi tion to poor management, a week organizational structure increases opportunity for senior executives to commit fraud. For example, where too much power is allocated to the CEO, the likelihood of perceiving opportunity to commit fraud without being caught is very high. According to a report by the Committee of Sponsoring Organizations of the Treadway Commission, in 83% of fraudulent financial reporting cases, either the CEO, the CFO, or both, were associated with financial statement fraud (Beasley, Carcello and Hermanson 2004. P. 24). Thus, management characteristics and the degree of influence that management has in controlling the working environment and the organizations activities can be subtly powerful influences that create the risk of fraud Another major cause of fraud is allowing employees to stay on a particular job for a too long. Usually, the longer one stays on the job, the more proficient he is likely to be. However, an employee who has stayed so long on a particul ar job may be encouraged to think that no one else can uncover their fraud. This factor influences fraud through the second element in the fraud triangle perceived opportunity. Research evidence also suggests that poor salaries and poor conditions of service can also encourage fraud. Employees that are poorly paid are often tempted to fraudulently convert some of the employers monies to their own use in order to meet their personal and social needs. This temptation is stronger on employees who have to deal with cash and near cash instruments because they are easier to steal. This factor is related to the second element of the fraud triangle Perceived Pressure. Frustration could also lead to fraud. Employees who feel that they have been cheated by their employer in terms of remuneration or promotion are more likely to rationalized fraudulent action than those who feel that they have been treated fairly. According to the European Journal of Social Sciences Volume 10, Number 4 (2009), where a staff feels short-changed in terms of promotion and other financial rewards, they become frustrated and such frustration could lead to fraud as such employee would attempt to compensate himself in his own way. This factor is related to the third element of the fraud triangle Perceived Rationalization. Fraud Management In devising fraud policy, the organization should appreciate the main features of fraud. Frauds involve misappropriation of assets and manipulation or distortion of data and most frauds result from basic failure and inadequacies of internal controls. According to fraud reports paper by the Association of Certified Fraud Examiners (https://www.acfe.com/documents/sample-documents/sample_report.pdf), more than 50% of all frauds are committed by insider usually in collusion with outside third parties, and mostly are discovered by accident or tip offs rather than internal and external auditors. Therefore Management should evolve positive attitudes towards safeguarding the organizations assets and ensuring that staff does not exploit the weakness in internal control. Fraud policies should also stress the cardinal principles of separation of duties to ensure that one person does not originate and complete an assignment or entry. Good fraud policy should emphasize dual control of sen sitive areas such as strong rooms and locks to security documents and account, the need for daily balancing of account and the various precautions that include necessary references for opening of accounts. . . What Constitute Fraud Fraud can occur in a variety of ways and it is important for everyone in our organization to have a good understanding of what constitutes fraud so that they can recognize it and take action to prevent it. What is acceptable in one organization may be seen as fraudulent in another organization. It is therefore impossible to give an exhaustive list of actions and omissions that constitute fraud in all organizations. However, the following list provides examples of the types of conduct that would be included within the definition of fraudulent behavior in most organizations: Dishonestly assisting or enabling the unlawful or unauthorized transfer, use or allocation of the organizations property and assets including moneys and/or funds held by or on trust for the organization. Unlawful or unauthorized disclosure or use of confidential information that is dishonest. Dishonestly obtaining or using property that belongs to the organization. Knowingly making or using forged or falsified documents that is dishonest. Dishonestly using the organizations computers, vehicles, telephones, credit cards, cab vouchers and other property or services. Dishonestly falsifying invoices for goods or services. Dishonestly using purchase or order forms to gain a personal benefit. Receiving or giving kickbacks or secret commissions to or from third parties. Misuse of assets, such as unauthorized personal use of organizational assets including motor vehicle, computers, stationery Failure by staff to adhere to delegations of authority relating to the value of assets or contracts they can sign for Fraudulent financial reporting, including intentional distortion of financial records or supporting documentation Engagement of trade contractors, subcontractors or consultants who have inappropriately close relationships with staff FRAUD POLICY AND FRAUD PREVENTION Given the cost of fraud, prevention is more cost beneficial than attempting to remediate a fraud that has already occurred. According to ACFE, an organization defrauded is unlikely to ever recover its losses, with almost 40% of victims recovering nothing at all. The objective for every organization should therefore be to establish a formal fraud prevention policy covering working practices and business ethics. The most effective deterrent to fraud is a strong perception of detection. A formal fraud policy statement indicates that the fight against fraud is endorsed, and supported at the most senior level within the business. The most effective way to prevent fraud is creating and maintaining appropriate fraud policies to address the three elements in the fraud triangle. In other words, the effective fraud control policies must include procedures that reduce perceived opportunity for fraud, reduce pressure to commit fraud and minimize the motivation for the rationalization of fra ud. The content may vary from business to business but should typically include the following: An outline of the structure of the organization A statement of the agencys attitude and approach to fraud control A summary of the risks identified in the fraud risk assessment Details of the strategies that will address these risks, including Allocation of responsibility for implementing the strategies Details of strategies to ensure compliance with the guidelines, including Strategies for collecting and reporting on fraud and fraud control information. Details of how employees, contractors and members of the public can report fraud against the agency Procedures to assist the police in the investigation and prosecution of suspected fraudsters Recover wrongfully obtained assets from fraudsters POLICIES AIMED AT ELIMINATING PERCEIVED OPPORTUNITIES FOR FRAUD A complaint or tip hotline can help strengthen the perception of detection as calls are monitored a nd acted upon and the results publicized. The appointment of Fraud Control Officer will go a long way to reduce the perceived opportunity for fraud. The existence of a senior officer responsible for fraud send the signal that the fight against fraud is endorsed and supported at the most senior level within the business. It also indicates that actions and procedures are monitored in the organization. The Fraud Control Officer shall be responsible for the implementation and ongoing monitoring of this policy, to coordinate the fraud and corruption risk assessment process, to record and collate fraud and corruption incident reports and to conduct or coordinate the Companys investigations into allegations of fraud and corruption. Targeted post transactional review could also reduce the perceived opportunity for fraud. If employees know that all transactions are subject to review, they are less likely to falsify record than where they believe they can get away with fraud. Strateg ic use of computer systems including effective data mining and real-time transaction assessment to identify suspect fraudulent transactions Ensure that appropriate action is taken if fraudulent conduct is detected. Procedures for use of corporate credit cards. For example corporate credit cardholders must be made to sign cardholder agreement prior to issue of card and Credit cards must be subject to Financial Delegations Policy and acquittal process and original receipts for corporate credit cards must be required for acquittal Appropriate controls for tendering processes, purchasing and contract management; POLICIES AIMED AT ELIMINATING PERCEIVED PRESSURE TO COMMIT FRAUD Pre-employment screening should be carried out by the Company for all new employees. This may include verification of identity, reference checks with recent employers, consideration of any gaps in employment history and the reasons for those gaps and verification of formal qualifications claimed. Transparency in evaluation of contracts and commercial activities. Policies to discourage conflicts of interest in the tender evaluation process Policies to promote an open and ethical culture within the organization which deems unethical behaviour unacceptable and punishable POLICIES AIMED AT ELIMINATING THE MOTIVATION FOR FRAUD RATIONALIZATION. To discourage rationalization of fraud, the policy should incorporate clauses that emphasize investigation and possible prosecution of suspected frauds. Employees should be made aware of the risks of attempting to defraud the organization and the action expected if caught. The strongest deterrent for fraud is the fear of sanctions and punishment when caught. Therefore, fraud policies must clearly spell out prosecution procedures and punishments for various degrees of fraud including fraud attempts According to Kranacher, 2010 a fraud policy statement should make clear that all employees have a responsibility for fraud prevent ion and detection. It is important the statement be actively and regularly promoted throughout the organization to all employees, irrespective of grade, position or length of service. Fraud policy should make it possible for employees to report fraud or corruption concern directly to their manager or supervisor and provide alternative means of raising concerns and suspicions outside the usual channels. There should be procedures to encourage management and staff to report their suspicions while guaranteeing anonymity. The Company should ensure that they have a policy on whether and how allegations of fraud and corrupt conduct should be reported to the police or other law enforcement agency. There should be clear policy on how to prosecute offenders and, where appropriate, and to seek to recover monies and costs through legal means. The outcome of disciplinary proceedings related to any case of fraud may involve the admonition, termination, demotion, fining, or reduction in sen iority of an employee or other internal person. CONCLUSIONS AND RECOMMENDATIONS Trust is an essential component of every organization, but sometimes trust is not enough. Fraud does happen and often when and where it is least expected. When developing a fraud control policy examine all activities of your organization, not just the areas where money is receipted. In contrast, frauds are not representative, routine, or regular. They are the result of an intelligent human being intentionally circumventing controls and hiding his or her tracks New compliance and fraud detection changes can only be successful if they either (1) eliminate the factors that contribute to fraud or (2) help auditors to be more effective in detecting fraud. The fraud triangle provides insight into their effectiveness because it provides a framework for evaluating how these acts reduce or eliminate fraud pressures, opportunities, and rationalizations To provide more than reasonable assurance that financial statement fraud is not being committed, fraud audits rather than GAAS au dits need to be performed. Understanding why and how individuals commit fraud is the key to fraud prevention. Pressure to commit fraud combined with opportunities to do so have led to many financial statement frauds in recent years. Some people are also able to rationalize fraudulent actions by arguing that they will benefit themselves or their companies. To prevent fraud, it is necessary to reduce the pressures and opportunities, but also to hire people of sufficient integrity who will not rationalize fraud. Fraud Control Policy and Management Plan on an ongoing basis, and we will regularly review our internal controls and any instances of fraud and corruption and review the fraud control plan and make adjustments as necessary. The opportunity to commit fraud requires knowledge of our organizations systems, or those of other organizations, combined with the willingness to exploit any weakness in those systems for direct personal benefit or for the benefit of other s. It uses deceit, trickery, sharp practice or sometimes simply a belief that the ends justify the means. We aim to foster an organizational culture which will ensure that the effective prevention of fraud and corruption is an integral part of our operating activities. We will identify and promptly investigate any suspicion of fraudulent or related dishonest activities. When appropriate we will pursue legal remedies available under the law. All our employees are accountable for, and have a role to play in, fraud and corruption control. We encourage a positive culture within our staff to disclose actual or suspected fraudulent. We will investigate all reports thoroughly. Where this is the appropriate course of action, we will protect the anonymity of anyone reporting these activities. Any staff member who suspects that such activity is occurring is to follow the procedures outlined in the Whistleblower Guide.

Should Downloading Be Broken Up Essay - 1251 Words

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