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Preventing and Detecting Fraud
Part two of a series on employer and employee fraud
Although the global economy has showed improvement since Briefly Speaking introduced the subject of preventing and detecting fraud in the January 2009 issue, experts agree that regaining the public trust will continue to be an uphill struggle for government and business alike. And that means companies must remain aware of opportunities for employees to commit fraud for either their own benefit or the organization’s by taking steps to prevent financial fraud and abuse, or in the worst case scenarios, detect it.
Prevention
"Internal controls are an integral component for fraud prevention, but developing, implementing and monitoring them can be an overwhelming task," says Anthony Masztak, manager for Gleason & Associates.
Fortunately, there are guidelines and standards. Seven years ago U.S. Senator Paul Sarbanes, a Democrat from Maryland, and US Representative Michael Oxley, a Republican from Ohio, introduced legislation that set new financial reporting standards for public companies. Section 404 of what is now known as the Sarbanes-Oxley Act of 2002 governs a public company's internal control framework, including:
- Segregation of duties. For example, are the appropriate financial personnel properly aligned with their roles and responsibilities?
- Control activities within the revenue, expenditures, inventory, fixed asset, payroll, financial reporting and treasury cycles. Are policies, procedures and the appropriate accounting treatments in place and practiced?
- Financial analysis. Do a strong Audit Committee and/or Board of Directors exercise oversight?
"While Sarbanes-Oxley doesn't apply to privately
held companies, the practices resulting from this landmark legislation
can help organizations of all sizes prevent fraud," says Masztak,
who helps analyze the effectiveness of internal control frameworks for
companies.
Honor is difficult to legislate, however. "In our experience one
of the most effective strategies for preventing fraud is setting a tone
at the top that focuses the organization on fraud prevention and ethical
conduct," he says.
Detection
While a strong set of internal controls can help prevent fraudulent transactions,
they can't guarantee that fraud won't occur. Employees who collude
or work together to commit fraud can circumvent internal controls even
when the controls are operating effectively.
Detecting fraud is critical to not only stopping the misappropriation
of money, but also recovering funds and preventing the fraudulent behavior
from occurring again. "Detection can be difficult for companies because
it often involves trusted, longtime employees," Masztak notes.
Consultants who are Certified Fraud Examiners and Certified in Financial
Forensics can play an impartial role in detecting employee fraud. "In
a fraud detection engagement, we'll conduct interviews with employees
to understand the weaknesses of the internal controls framework, identify
the employees who have the accessibility to commit fraud, analyze a company's
financial records and verify the accuracy of the records by obtaining
supporting documentation," he says. "We then focus our efforts
within these areas to identify potentially fraudulent transactions."
Excerpted from Briefly
Speaking, a complimentary newsletter published
by Gleason & Associates.
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