Fraud Risk Management: An Organizational Approach

Editor’s note: The following excerpt is from the cover article of our latest Fraud 360 magazine (Issue 1 2015)

By Javeria Adeel

The most effective fraud risk management empowers an organization to control the level of fraud risk. A good place to start for a Fraud Risk Manager wishing to implement a strategy is to look at any previous cases of fraud, both internal and external to the organization, and draw up a list of the major elements which should be in place to reduce the risk of similar events occurring in the future.

Modes of Fraud in an Organization

The size of an organization does not matter in terms of whether fraudulent “black sheep” are present in the organization. There are numerous modes of fraud in any organization, but the most common methods are:

·         Billing

·         Corruption

·         Expense reimbursement

·         Skimming

·         Non-cash fraud

·         Check tempering

·         Payroll

·         Cash on hand

·         Cash larceny

·         Financial statement fraud

·         Register disbursement

Anti-fraud Control Measures

It is not possible for an organization to completely eliminate the chance of fraud, but there are certain ways by which the organization can reduce the risk of fraud to a great extent. The most common measures taken by organizations to reduce the risk of fraud include the following:

·         External audit

·         Code of conduct

·         Management of certificates

·         Internal fraud audit

·         Fraud hotline

·         Fraud training of managers and executives

·         Anti-fraud policy

·         Formal fraud risk assessment

·         Surprise audit

·         Job rotation

·         Mandatory vacations

·         Rewards for whistleblowers

Causes of Fraud in an Organization

Why do people commit fraud? There is no single reason, and any explanation of why fraud occurs needs to take account of various factors:

·         Motivation of potential offenders

·         Conditions under which people can rationalize away their prospective crime(s)

·         Opportunities to commit crime(s)

·         Technical ability of the fraudster

·         Expected and actual risk of discovery after the fraud has been carried out

·         Expectations of consequences of discovery (including non-penal con-sequences such as job loss and family stigma, proceeds of crime confiscation, and traditional criminal sanctions)

·         Actual consequences of discovery

A common model that brings together a number of these aspects is the Fraud Triangle. This model is built on the premise that fraud is likely to result from a combination of three factors: motivation, opportunity and rationalization.

An Anti-fraud Strategy

A fraud risk framework is intended to detect, prevent and identify frauds and to develop an organizational response to its risks. An effective anti-fraud strategy has four main components: prevention, detection, deterrence and response.

Read the full article and learn more about developing an anti-fraud strategy in Fraud 360 magazine. Just sign up (for free) to subscribe and get immediate access to the online version.