Preventing Fraud - Auditing Forensic FEB

CHAPTER
Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved.
May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
4 Preventing Fraud

May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2
CHAPTER 4
 The chapter identifies two major ways that
organizations can work to prevent fraud: (1) create a
culture of honesty, openness, and assistance; and (2)
eliminate opportunities for fraud.
 There are several ways to do each of these which are
covered in this chapter. You should realize, however,
that no matter how good an organization's fraud
prevention efforts are, an organization will never
prevent all fraud using cost-effective techniques.
To the Students

CHAPTER 4
After studying this chapter, you should be able to:
 Understand how to create a culture of honesty,
openness, and assistance.
 Know how to eliminate opportunities for fraud.
 Understand how to create an effective organization to
minimize fraud.
 Understand the importance of proactive fraud
auditing.
 Understand the importance of creating a
comprehensive approach to fighting fraud.
LEARNING OBJECTIVES

CHAPTER 4
 It would be nice to believe that most individuals and
employees are so honest that they would never
commit fraud.
 Unfortunately, most people are capable of committing
fraud, and most people adapt to their environments.
 When placed in an environment of low integrity, poor
controls, loose accountability, or high pressure, people
tend to become increasingly dishonest.
Just About Everyone Can Be Dishonest

CHAPTER 4
 Three major factors in fraud prevention relate to
creating a culture of honesty, openness, and
assistance.
 These three factors include:
 Hiring honest people and providing fraud awareness training
 Creating a positive work environment, which means having a
well-defined code of conduct, having an open-door policy, not
operating on a crisis basis, and having a low-fraud atmosphere
 Providing an employee assistance program (EAP) that helps
employees deal with personal pressures
Creating a Culture of Honesty, Openness, and
Assistance

CHAPTER 4
Creating a Culture of Honesty, Openness, and
Assistance—Illustration

CHAPTER 4
 Verify all information on the applicant’s résumé and/or
application using the following suggestions:
 Require all applicants to certify that all information on their
application and/or résumé is accurate
 Train those involved in the hiring process to conduct thorough
and skillful interviews
 Use industry-specific or other approaches as deemed
necessary (credit checks, fingerprinting, drug tests, public
record searches, honesty tests, etc.)
Verify Applicant’s Résumé and Application

CHAPTER 4
Hiring Policies and Practices

CHAPTER 4
 Create a positive work environment, making the
organization less vulnerable to fraud, by
 Creating expectations about honesty through having a good
corporate code of conduct and conveying those expectations
throughout the organization
 Having open-door or easy access policies
 Having positive personnel and operating procedures
Creating a Positive Work Environment

CHAPTER 4
10
Figure 4.1 Hormel Foods Code of Conduct
Topics Addressed
 Figure 4.1 shows an
example of a good
code of ethics for all
employees.
 Refer to Figure 4.1 in
textbook to see all
the text.
Conflict of Interest
Gifts
Corporate Opportunities
Illegal Payments
Illegal Political
Contributions
Protection and Proper
Use of Company Assets
Proper Accounting
Insider Trading
Confidential Information
Inventions, Developments,
Improvements
Antitrust Compliance
Fair Dealing
Harassment
Safety
Government Reporting
Environmental
Responsibility
Product Integrity
Diversity
Fair Employment Practices
Foreign Trade
Responsible Delegation
Disciplinary Action
Reporting Illegal, Unethical
Behavior, or Violations of
the Code
Waivers of the Code

CHAPTER 4
 Help employees deal with:
 Substance abuse
 Gambling
 Money management
 Health, family, and personal problems
 Provide support systems with programs like:
 Wellness
 Team building
 Coaching
 Conflict resolution
 Critical incident response
 Assessment
 Counseling
 Referral
Implementing Employee Assistance Programs
(EAPs)

CHAPTER 4
12
Table 4.1 Creating a Culture of Honesty,
Openness, and Assistance

CHAPTER 4
 Five methods of eliminating fraud opportunities:
 Having good internal controls
 Discouraging collusion between employees and customers or
vendors and clearly informing vendors and other outside
contacts of the company’s policies against fraud
 Monitoring employees and providing a hotline (whistle-blowing
system) for anonymous tips
 Creating an expectation of punishment
 Conducting proactive auditing
 Each method reduces either the actual or the perceived
opportunity to commit fraud.
Eliminating Opportunities for Fraud to Occur

CHAPTER 4
 Committee of Sponsoring Organizations’ (COSO)
definition of an internal control framework includes
the following elements:
 Good control environment
 Risk assessment process
 Set of control activities
 Information and communication system (including the
accounting system)
 Process of monitoring compliance with the controls
Having a Good System of Internal Controls

CHAPTER 4
15
Figure 4.2 Assessing Risk and Implementing
Appropriate Controls

CHAPTER 4
 Segregation of Duties
 Having two people do a task together or splitting the task into parts so that no
one person handles the complete assignment
 Authorizations
 Having a system of proper authorizations so that only authorized or designated
individuals have permissions to complete certain tasks
 Physical Controls
 Implementing physical safeguards such as locks, keys, safes, fences, and so on, to
prohibit access to assets and records
 Independent Checks
 Implementing a system of independent checks such as job rotations, mandatory
vacations, audits, and so on
 Documentation
 Having a system of documents and records that provide an audit trail that can be
followed to check on suspicious activity and to document transactions
Control Activities

CHAPTER 4
17
Table 4.2 Types of Control Activities

CHAPTER 4
 Approximately 29 percent of frauds involve collusion
 Ways to discourage fraud involving collusion
 Use periodic letters to explain policies to vendors
 Include a “right-to-audit” clause on all purchase invoices
 “right-to-audit” clause is a provision in a contract that gives
one party the right to audit another party to the contract
Discouraging Collusion between Employees and
Others

CHAPTER 4
 “Scope and Methodology: The audit shall cover the
following areas: [List specific areas, processes, or activities
subject to audit, such as pricing, quality control, delivery
timelines, and regulatory compliance]. The audit will be
conducted in accordance with industry best practices and
any relevant standards specified in this Agreement.
 Access and Documentation: Vendor shall provide the
Purchaser or its authorized representatives with access to all
relevant records, documents, and facilities necessary for the
audit. This includes, but is not limited to, invoices, contracts,
quality control records, and any other documentation
pertinent to the audit scope.
Example Right-to-audit clause

CHAPTER 4
 Close monitoring
 Facilitates early detection
 Deters frauds because potential perpetrators realize that
“others are watching”
 A good whistle-blowing program is one of the most
effective fraud prevention tools.
 Approximately 33 percent of all frauds are detected through
tips.
 Section 806 of the Sarbanes-Oxley Act of 2002 requires all
public companies to have a whistle-blower system.
 Government agencies and some foreign companies have
whistle-blower systems.
Monitoring Employees and Having a Whistle-
Blowing System

CHAPTER 4
 Anonymity
 Independence
 Accessibility
 Follow-up
Elements of an Effective Whistle-Blowing System

CHAPTER 4
 Fear of punishment
 Examples of punishment
 Termination—not always a real punishment
 Having to disclose dishonest behavior to family and friends
 Prosecution
 Expectation of punishment can be conveyed by
 Having a policy that states employees who engage in fraud will
be prosecuted to the fullest extent of the law
 Applying the policy
Creating an Expectation of Punishment

CHAPTER 4
 Good fraud auditing involves four steps:
 Identify fraud risk exposures
 Identify the fraud symptoms of each exposure
 Build audit programs to proactively look for symptoms and
exposures
 Investigate fraud symptoms identified
Conducting Proactive Fraud Auditing

CHAPTER 4
 Fraud is reduced and prevented by
 Creating a culture of honesty, openness, and assistance
 Eliminating fraud opportunities
Preventing Fraud—A Summary

CHAPTER 4
25
Figure 4.3 Fraud Prevention

CHAPTER 4
 Many companies do NOT have a comprehensive
approach to fighting fraud.
 Responsibility for fraud in an organization is often seen as
belonging to “someone else.”
 A “non-ownership” attitude regarding fraud is common.
A Comprehensive Approach to Fighting Fraud

CHAPTER 4
 The current model that many organizations use for
dealing with fraud is characterized by four stages:
 Fraud incident
 Investigation
 Action
 Resolution
 Once these four stages are completed, no further
action is taken—until another fraud occurs.
 Fraud will never decrease with this model.
 Fraud will become a recurring problem.
Organizations and Fraud—The Current Model

CHAPTER 4
28
Figure 4.4 Dealing with Fraud:
The Current (Default) Model

CHAPTER 4
Element 1: Positive tone at the top
Element 2: Education and training for employees and others
about the seriousness of fraud and informing them
what to do if fraud is suspected
Element 3: Integrity risk assessment and having a good internal
control system
Element 4: Reporting and monitoring system
Element 5: Proactive fraud detection methods in place
Element 6: Effective investigation and follow-up when fraud
occurs
Elements of Fraud-Fighting Model

CHAPTER 4
30
Figure 4.5 Sound Organizations—Minimal
Fraud

Preventing Fraud - Auditing Forensic FEB

More Related Content

Similar to Preventing Fraud - Auditing Forensic FEB (20)

Recently uploaded (20)

Preventing Fraud - Auditing Forensic FEB