Fraud Examination, 3E

Chapter 4: Preventing Fraud

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Learning Objectives• Understand how to create a culture of

honesty, openness, and assistance• Know how to eliminate opportunities for

fraud• Understand how to set up an organization

to effectively minimize fraud

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Organizational Culture

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Way to Create a Culture of Honesty, Openness, and Assistance How This Step Is Accomplished

1. Hire honest people and provide fraud awareness training.

1. Verify all information on the applicant’s résumé and application.2. Require all applicants to affirm the truth of the matters set forth in their application and résumé.3. Train management to conduct thorough and skillful interviews.

2. Create a positive work environment.

1. Create expectations about honesty by having a good corporate code of conduct and conveying those expectations throughout the organization.2. Have open-door or easy access policies.3. Have positive personnel and operating procedures.

3. Provide an employee assistance program (EAP).

1. Implement an EAP that helps employees deal with personal and nonsharable pressures in their lives.

Eliminate Opportunities for FraudFive ways to eliminate fraud opportunities: 1.Have good internal controls2.Discourage collusion 3.Monitor employees and provide a whistle-

blowing system4.Create an expectation of punishment and 5.Conduct proactive auditing

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Internal Controls

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Assess Risks ImplementControls

Segregation of Duties

Authorizations

Physical Controls

Independent Checks

Documentation

Whistle-blower SystemEffective systems have the following:• Anonymity• Independence• Accessibility• Follow-up

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Proactive Fraud AuditingGood fraud auditing involves four steps: 1.Identify fraud risk exposures2.Identify the fraud symptoms of each

exposure3.Build audit programs to proactively look

for symptoms and exposures4.Investigate fraud symptoms identified

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Preventing Fraud – A Summary

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Create a culture of Honesty, Openness, and Assistance

Eliminate Opportunities

Implement Employee Assistance Programs

Have a Code of Ethics

Create a Positive Work Environment

Hire honest people and provide fraud awareness training

Have good internal controls

Discourage Collusion

Publicize company policies

Monitor employees

Provide tip hotlines

Create an expectation of

punishment Proactively audit for fraud

Preventing Fraud – Current Model

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Stage 2:Investigation

Stage 1:Fraud Incident

Stage 4:Resolution

Stage 3:Action

Preventing Fraud – Suggested Model

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Tone at the Top

Education and Training

Investigation and Follow-up

Proactive Detection

Integrity Risk and Controls

Reporting and Monitoring