Fraud 101: Prevention, Detection and Response!
Fraud is defined as a wrongful doing intended for one’s personal and/ or financial gain and can commonly be broken down into three distinct categories: asset misappropriation, corruption and financial statement fraud. Common fraudulent activities include theft, corruption, embezzlement and bribery.
Asset misappropriation, although least costly to an entity, most often includes employee theft of cash and non-cash assets. Examples include stealing cash and creating fictitious invoices/ reimbursements.
Corruption schemes occur when employees use their influence and position of power dishonestly. Corruption includes bribery, extortion and conflict of interest.
Lastly, financial management fraud involves omitting or intentionally misstating financial information of an entity’s financial position and performance. This is often performed by inflating assets, understating liabilities and falsifying revenue.
Minimising fraud starts with strong internal controls and procedures implemented to not only prevent fraud, but to enhance the efficiency and effectiveness of operations too. Controls and procedures should also be designed to enrich the accuracy of financial reporting and aim to improve compliance risk.
Examples of fraud prevention include:
- Segregation of duties – where one employee is not solely responsible for the recording and processing of transactions
- Limited access and authorisation – access to financial data such as accounting software and online banking should be limited to permitted personnel only
- Policies and Procedures manual – written policies provide guidance and clarity in processes, procedures and direction in the workplace
- Delegation of authority – multi-tiered authorisation where the person who processes purchases cannot be the one to approve payments
In 2014, the Association of Certified Fraud Examiners (ACFE) revealed that on average, fraudulent activities begin 18 months before being detected. ACFE suggests, in addition to prevention strategies, detection methods should be considered. This can include reviewing:
- Round dollar payments including internal transfers
- Manual general journals
- The validity of Australian Business Numbers (ABN)
- Unusual credit notes offered at month or year-end
- Employees with large annual leave balances (employee role rotation supports peer reviews and could potential reveal abnormalities in tasks and behaviour)
Responding to Fraud
Employers should regularly re-assess their fraud risk whilst maintaining their professional scepticism.
An internal audit should be considered as a tool to help evaluate the efficiency and effectiveness of an internal process/ function (i.e. accounts payable or payroll). Internal audits also aim to improve the control environment of an organisation and increase the reliability and integrity of financial accounts. By performing periodic audits, this can also minimise and deter fraud risk and threats within an entity.