Effective Fraud Management: Fraud - Its Extent, Patterns and Causes

Effective Fraud
Management
Fraud its extent, patterns and causes
Training Schedule
10:00 to 11:00 Intro to fraud
11:00 to 11:15 Tea time
11:16 to 12:00 Risk Management
12:00 to 1:00 Fraud Preventation
01:00 to 2:30 Lunch break
02:30 to 03:30 Fraud detection
03:30 to 05:00 Responding to fraud
Types of fraud
Assest misappropriation
Cash
Non-cash
Fraudulent statements
Financial
Non-financial
Corruption
Conflict of interest
Bribery
Which businesses are affected?

Fraud is an issue that all organisations may
face regardless of size, industry or country. If

the organisation has valuable property (cash,
goods,information or services), then fraud
may be attempted.
The fraud triangle
Motivation or pressure
In simple terms, motivation is typically based on either greed or need.
Stoy Haywards (BDO) most recent FraudTrack survey found that greed
continues to be the main cause of fraud, resulting in 63% of cases in
2007 where a cause was cited. Other causes cited included problems
from debts and gambling. Many people are faced with the opportunity to
commit fraud, and only a minority of the greedy and needy do so.
Personality and temperament, including how frightened people are about
the consequences of taking risks, play a role.Some people with good objective
principles can fall into bad company and develop tastes for the fast life, which
tempts them to fraud. Others are tempted only when faced with ruin anyway.
Opportunity
In terms of opportunity, fraud is more likely in
companies where there is a weak internal

control system, poor security over company
property, little fear of exposure and likelihood
of detection, or unclear policies with regard to
acceptable behaviour. Research has shown
that some employees are totally honest,
some are totally dishonest, but that many are
swayed by opportunity.
Rationalisation
Many people obey the law because they believe in it and/or they are
afraid of being shamed or rejected by people they care about if they are
caught. However,some people may be able to rationalise fraudulent
actions as:
necessary especially when done for the business
harmless because the victim is large enough to absorb the impact
justifi ed because the victim deserved it or because I was
mistreated.
Who commits fraud?

Pre-planned fraudsters, who start out from
the beginning intending to commit fraud.

These can be short-term players, like many
who use stolen credit cards or false social
security numbers; or can be longer-term, like
bankruptcy fraudsters and those who execute
complex money laundering schemes.
Who commits fraud?

Intermediate fraudsters, who start off honest
but turn to fraud when times get hard or when

life events, such as irritation at being passed
over for promotion or the need to pay for care
for a family member, change the normal
mode.
Who commits fraud?

Slippery-slope fraudsters, who simply carry
on trading even when, objectively, they are

not in a position to pay their debts. This can
apply to ordinary traders or to major business
people.
Effective Fraud
Management
What is risk management?- an overview
What is risk management?

Risk management is defi ned as the process
of understanding and managing risks that the

entity is inevitably subject to in attempting to
achieve its corporate objectives.
The risk management cycle

Establish a risk management group and set goals.
Identify risk areas.
Understand and assess the scale of risk.
Develop a risk response strategy.
Implement the strategy and allocate
responsibilities.
Implement and monitor the suggested controls.
Review and refi ne the process and do it again.
Effective Fraud
Management
Fraud prevention
Fraud prevention
one of the most effective ways to deal with
the problem of fraud is to adopt methods that

will decrease motive, restrict opportunity and
limit the ability for potential fraudsters to
rationalize their actions.
Fraud detection
As fraud prevention techniques may not stop all potential
perpetrators, organisations should ensure that systems

are in place that will highlight occurrences of fraud in a
timely manner. This is achieved through fraud detection. A
fraud detection strategy should involve use of analytical
and other rocedures to highlight anomalies, and the
introduction of reporting mechanisms that provide for
communication of suspected fraudulent acts
Developing a sound ethical culture

Attitudes within an organisation often lay the
foundation for a high or low fraud risk

environment.Where minor unethical practices
may be overlooked (e.g. petty theft, expenses
frauds)
Periodic assessment of fraud risk

In order to manage fraud risk, organisations
should periodically identify the risks of fraud

within their organisation.
Fraud risks should be identified for all areas
and processes of the business and then be
assessed in terms of impact and likelihood. In
addition to the monetary impact, the
assessment should consider non financial
factors such as reputation.
Fraud risk training and awareness

Almost every time a major fraud occurs many
people who were unwittingly close to it are

shocked that they were unaware of what was
happening
Reporting mechanisms and

whistleblowing
Establishing effective reporting mechanisms
is one of the key elements of a fraud

prevention programme and can have a
positive impact on fraud detection. Many
frauds are known or suspected by people
who are not involved.
Responsibility for internal control

Overall responsibility for the organisations
system of internal control must be at the

highest level in the organisation.
Internal control systems

An internal control system comprises all
those policies and procedures that taken

together, support an organisations effective
and effi cient operation. Internal controls
typically deal with factors such as approval
and authorisation processes, access
restrictions and transaction controls, account
reconciliations, and physical security
Pre-employment screening
Pre-employment screening is the process of

verifying the qualifi cations, suitability and
experience of a potential candidate for
employment
Effective Fraud
Management
Fraud detection
Methods of fraud detection
Indicators and warnings

It will never be possible to eliminate all fraud.
No system is completely fraud proof, since

many fraudsters are able to bypass control
systems put in place to stop them.
Warning signs
Warning signs have been described as
organisational indicators of fraud risk.
Cultural issues?
Absence of an anti-fraud policy and culture.
Failure of management to implement a
sound system of internal control and/or to

demonstrate commitment to it at all times.
Management issues
Lack of fi nancial management expertise and professionalism in key
accounting principles, review of judgements made in management

reports and the review of signifi cant cost estimates.
A history of legal or regulatory violations within the organisation and/or
claims alleging such violations.
Strained relationships within the organisation between management
and internal or external auditors.
Lack of management supervision of staff.
Lack of clear management control of responsibility, authorities,
delegation, etc.
Bonus schemes linked to ambitious targets or directly to fi nancial
results.
Employee issues
Inadequate recruitment processes and absence of screening.
Unusually close relationships internal and external.
Potential or actual labour force reductions or redundancies.
Dissatisfi ed employees who have access to desirable asset
Unusual staff behaviour patterns.
Personal fi nancial pressures on key staff.
Low salary levels of key staff.
Poor dissemination of internal controls.
Employees working unsocial hours unsupervised.
Employees not taking annual leave requirements.
Unwillingness to share duties.
Process issues
Lack of job segregation and independent checking of key
transactions.
Lack of identifi cation of the asse
Poor management accountability and reporting systems.
Poor physical security of assets
Poor access controls to physical assets and IT security
systems.
Lack of and/or inadequacy of internal controls.
Poor documentation of internal controls.
Effective Fraud
Management
Responding to fraud
Purpose of the fraud response plan

The fraud response plan is a formal means of
setting down clearly the arrangements which

are in place for dealing with detected or
suspected cases of fraud.
Corporate policy
The fraud response plan should reiterate the
organisations commitment to high

legal,ethical and moral standards in all its
activities and its approach to dealing with
those who fail to meet those standards
Roles and responsibilities

Managers and supervisors
Finance director
Fraud offi cer (where applicable)
Human resources
Internal auditors (where applicable)
Audit committee (where applicable)
External auditors (where applicable)
Legal advisers (internal or external)
The response
IT staff
Public relations (PR)
Reporting suspicions
Police
Establish an investigation team
External consultants
Formulate a response
Insurers
The investigation
Preservation of evidence
A key consideration in any investigation must
always be how to secure or preserve suffi cient
evidence to prove a case of fraud.
Physical evidence
Electronic evidence
Statements from witnesses
Statements from suspects
Organization's objectives with respect

to dealing with fraud
Internal disciplinary action
A civil response
Criminal prosecution
A parallel response
Lessons learned
There are lessons to be learned from every
identifi ed incident of fraud, and the organisations
willingness to learn from experience is as important
as any other response. The larger organisation may
consider establishing a special group to examine the
circumstances and conditions which allowed the fraud
to occur, with a view to making a report to senior
management detailing improvements to systems
and procedures. A smaller organisation may consider
discussing the issues with some of its more experienced
people, with the same objectives in mind

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Effective Fraud

Fraud its extent, patterns and causes

Which businesses are affected?

face regardless of size, industry or country. If

The fraud triangle

companies where there is a weak internal

Who commits fraud?

the beginning intending to commit fraud.

Who commits fraud?

but turn to fraud when times get hard or when

Who commits fraud?

on trading even when, objectively, they are

What is risk management?- an overview

What is risk management?

of understanding and managing risks that the

The risk management cycle

the problem of fraud is to adopt methods that

perpetrators, organisations should ensure that systems

Developing a sound ethical culture

foundation for a high or low fraud risk

Periodic assessment of fraud risk

should periodically identify the risks of fraud

Fraud risk training and awareness

people who were unwittingly close to it are

Reporting mechanisms and

is one of the key elements of a fraud

Responsibility for internal control

system of internal control must be at the

Internal control systems

those policies and procedures that taken

Pre-employment screening is the process of

Methods of fraud detection

Indicators and warnings

No system is completely fraud proof, since

organisational indicators of fraud risk.

sound system of internal control and/or to

accounting principles, review of judgements made in management

Purpose of the fraud response plan

setting down clearly the arrangements which

organisations commitment to high

Roles and responsibilities

Organization's objectives with respect

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