Fraud Prevention Programs and Procedures
Fraud prevention requires a system of policies and procedures, which, in their aggregate, minimize the likelihood of fraud occurring while maximizing the possibility of detecting any fraudulent activity that might transpire. We often compromise the possibility of apprehending potential perpetrators by not committing fraud. Because of this principle, the existence of a thorough control system is essential to fraud prevention.
Management of Fraud Prevention
Management might be resistant to supporting investment in fraud prevention measures for one of several reasons, including:
- Management’s concerns relate to areas other than audit or fraud. Those in charge don’t typically understand that fraud is hidden and that losses go undetected. They also might refuse to believe that their own workers are capable of stealing even when studies suggest that one-third of employees might do such a thing.
- Because of the hidden nature of fraud, managers are understandably reluctant to believe in the presence of fraud. And, if one employee is caught committing fraud, management might too often claim that it is an isolated problem and not worth additional consideration. The management must understand that when we detect fraud cases, it is too late to do anything about them.
- Management sometimes unreasonably feels that bringing up the issue will alienate the workforce.
- We can tackle the problem by reminding management that ordinary workers can work for an honest company. It is also helpful to point out to management what the losses might be.
Many anti-fraud professionals complain that management does not adequately support fraud prevention efforts. There are generally two reasons behind this complaint: Management either believes that fraud is not really a problem in the company, or it believes that even addressing the subject has a negative impact. In either scenario, it is difficult for the auditor to break down management’s built-in resistance to dealing with fraud prevention. Some of the following suggestions might be helpful in “selling” fraud prevention to management.
The Impact on the Bottom Line
One of the best ways to sell management on fraud prevention is by showing the impact on the bottom line. Fraud impacts net sales dollar for dollar. For example, if a company nets 20 percent on sales, it must sell five items at regular prices to recover losses (cost plus lost profit) from the theft of one item. Fraud can be very expensive.
The cost/benefit analysis of investing in fraud prevention should be clear. It is much more cost-effective to proactively address fraud risks than to suffer preventable fraud and spend valuable resources on detecting, investigating, prosecuting, and cleaning up after it. In other words, stopping fraud before it occurs directly increases the organization’s bottom line.
The Impact of Negative Publicity
Many corporate executives are more sensitive to adverse publicity than almost any other issue. Certainly, one way to convince management of the logic of fraud prevention is to point out that negative publicity can have a devastating impact on the bottom line, even in small cases. We can eliminate or reduce this negative impact through a proactive fraud prevention program.
Procedures to Prevent Fraud
Below are examples of procedures and mechanisms that we specifically designed to detect and prevent fraud.
Increasing the Perception of Detection
Most experts agree that it is much easier to prevent fraud than to detect it. To prevent fraud, we should understand something about the potential perpetrator’s mindset. Increasing the perception of detection might be the most effective fraud prevention method. Controls, for example, do little good in preventing theft and fraud if those at risk do not know of the presence of possible detection. In the audit profession, this means letting employees, managers, and executives know that auditors are actively seeking out information concerning internal theft. This can be accomplished in several ways, such as through proactive audit policies, employee anti-fraud education, enforcement of mandatory-vacation and job- rotation policies, strong management oversight, and effective reporting programs.
Proactive Audit Procedures
Implementing proactive audit procedures demonstrates management’s intention to aggressively seek out possible fraudulent conduct instead of waiting for instances to come to management’s attention. Such procedures include the use of analytical review, fraud assessment questioning, and surprise audits where possible.