Preventing Fraud - Chapter 4

Major factors in Fraud Prevention

1. Hiring honest people & providing fraud awareness training

2. Creating a positive work environment

3. Providing an employee assistance program (EAP)

Positive Work Environment Activities

1. well-defined code of conduct

2. open-door policy

3. not operating on a crisis basis

4. having a low fraud atmosphere 

A careful review in hiring honest people involves:

verifying all information on resume/application, interview thoroughly, arrange for fraud awareness training of all new hires Ex. Background checks, original documentation, vigilance & reporting procedure training

Studies have indicated that ___ percent of Americans are dishonest, ___ are situationally dishonest, and ___ percent are honest all the time.

30%, 40%, 30%

25% of fraud are committed by employees who have been there…

3 years or less at the firm.

Positive work Environment Activities

respecting employees, tone at the top sets example, code of ethics, communicate expectations and punishments

Employee Assistance Programs (EAP)

Research shows that program benefits out weigh these costs of them. Helps employees deal with personal and non-sharable pressures in their lives. Creates support systems such as counseling, conflict resolutions, and wellness programs.

Methods of Eliminating Fraud Opportunities

1. Good internal controls 

2. Discourage collusion, alert those to company policies

3. Monitor employees, install hotlines

4. Create punishment expectations

5. Proactively audit for fraud

Good control activities

physical controls, segregation of duties, independent checks, proper documentation.

Internal Control Framework

Good control environment, good accounting system, good control activities, monitoring, good communication & information system

Effectiveness of internal control depends on 

competency and dependability of people enforcing 

To discourage collusion, kickbacks or bribes…

enforce mandatory vacations or job transfers, and right-to-audit clause for vendors.

Monitoring and implementing a whistle blower system…

helps identify lifestyle changes and makes tips and complaints easier to report suspicious behavior

Many organizations avoid taking legal action against fraudsters because of…

high legal costs and bad publicity for the company

Fear of punishment is one of the greatest fraud deterrents because…

stringent prosecution policies should be followed, termination is not enough

Proactive Fraud Auditing Steps 

1. Identifying risk exposures

2. Identifying fraud symptoms for each exposure 

3. Building audit programs that proactively look for symptoms and exposure

4. Investigate identified symptoms

SOX Act now requires public auditors to…

proactively audit for fraud