Fraud Exam 2

Savings in Fraud Prevention

No detection or investigation costs

No damaged lives or reputations 

No tough termination or prosecution decisions

No valuable work time lost

No adverse effects on corporate culture 

No loss in productivity 

Factors in Creating a Low-Fraud Environment

Create a culture of honesty, openness, and assistance

Eliminate opportunities to commit fraud

Create expectations that fraud will be punished

Creating a Culture of Honesty, Openness, and Assistance

Hiring honest people and providing high-quality fraud awareness training

Creating a positive work environment

Providing an employee assistance program (EAP)

Liabilities of Poor Hiring

An employer may be liable for an employee’s acts or omissions under a negligent hiring and/or retention claim. Liability scope can be both within and outside the employment setting.

No employer can totally immunize itself from claims asserting negligent hiring and/or negligent retention.

Following fraud-preventative hiring practices minimizes both fraud and negligent hiring claims.

Verify Applicant’s Resume and Application

Employers must verify resume information for applicants to management or other responsible positions. Verification should include all prior work history and relevant credentials and should be conducted by an employee of the hiring company or a reputable independent agency.

Increases knowledge of candidates’ qualifications and helps gain insight into candidates’ honesty.

Restrictions on Resume Verification

Employers must obtain written authorization from the applicant to verify resume information.

Federal and state agencies forbid questioning applicants on the following topics unless they are job-related: arrest and garnishment history; marital status; contraception, pregnancy, childbearing and childcare plans; height, weight, and disabilities; nationality, race, or ancestry. 

Certify Application and Resume Accuracy

Employers should require that all applicants themselves certify that their application information is correct. Requirements to affirm the truth serves as a deterrent to deception.

Inform applicants that the discovery of false or omitted application information is grounds for immediate termination. Termination could proceed at any time following hiring, regardless of the employee’s behavior and performance on the job. 

Train Those Involved in the Hiring Process

Conduct skillful interviews by including company-wide standard questions plus additional questions tailored to the position and candidate.

Access candidate’s credit history, which is important for positions in financial institutions.

Contact multiple references.

Do not ask illegal questions or make illegal assumptions.

Make Ethics Training Part of Employee Onboarding

Newly hired employee awareness training should include acceptable and unacceptable job behavior, the effects of dishonesty on both victims and perpetrators, and what actions they should take if they witness improper behavior.

Training should include the cost of fraud, as money lost to fraud reduces funds available for employee salaries and benefits.

Effective employee training reduces fraud substantially.

Creating a Positive Work Environment

Creating expectations about honesty.

Having open-door or easy-access policies.

Having positive personnel and operating procedures.

Consequences of Unacceptable Behavior

A good code of conduct specifies disciplinary action applied to violators. Convey that, since fraud hurts the organization, dishonest acts will not be tolerated. Employees must understand that whatever benefits they feel they would get from committing fraud are not worth the consequences. 

Employee Assistance Programs (EAP)

Provide employees with effective ways to deal with the personal pressure that incentivizes fraud.

5 Methods of Eliminating Fraud Opportunities

1. Having good internal controls

2. Discouraging collusion between employees and customers or vendors

3. Monitoring employees and providing a hotline for anonymous tips

4. Creating an expectation of punishment

5. Conducting proactive auditing

Internal Controls

Control environment, risk assessment process, set of control activities, information and communication systems, process of monitoring compliance with controls

Control Environment

The overall tone of the organization established by management through modeling, communication, and other activities.

Effective Control Systems

A good accounting system provides timely, valid, complete information to stakeholders for decision making. 
Includes physical control of assets, proper authorizations, segregation of duties, independent checks, and proper documentation.

Preventative Controls

Segregation of duties, system of authorizations, physical safeguards.

Detective Controls

Independent checks and documents and records.

Discouraging Collusion

Fraud that involves collusion involves the largest amounts and is the most difficult to detect. Collusive fraud is slower to develop than individual fraud.
Employees responsible for large vendor contracts may be tempted to accept bribes and kickbacks. They must communicate a “right-to-audit” all purchase relationships.

Monitoring Employees

Employees do not commit fraud and hoard stolen proceeds. By paying attention to employee lifestyle expenditures, managers can detect fraud early. Employee monitoring by colleagues detects and deters fraud. 
In spite of technological advances, the most common way in which fraud is detected is through tips (anonymous reporting). Maintaining anonymous whistleblowing systems encourages employees to report fraud. 

Elements of an Effective Whistleblowing System

Anonymity, independence, accessibility, follow-up

Anonymity

Conceal the identity of the whistleblower and protect them from retribution.

Independence

Employees prefer to disclose misconduct to an independent party, not someone in their own company.

Accessibility

Provide multiple reporting channels including telephone, email, online, or mail.

Follow-Up

Reported incidents must be followed up and corrective action taken when necessary.

Creating an Expectation of Punishment

One of the greatest deterrents to dishonesty is fear of punishment. In today’s business and social environment, termination from a job is not a meaningful punishment. Real punishment is disclosing dishonesty to friends and family. 

A strong, well-publicized prosecution policy lets employees know that dishonest acts will be harshly punished and that not everyone is honest. Failure to take legal action sends the message that fraud is tolerated. 

Conducting Proactive Fraud Auditing

Companies that proactively audit for fraud create awareness among employees that their actions are monitored.

Good auditing involves identifying fraud risk exposures, identifying the fraud symptoms of each exposure, building audit programs to proactively look for symptoms and exposures, and investigating fraud symptoms that are identified. 

Comprehensive Approach to Fighting Fraud

Combines prevention, detection, investigation, and follow-up. Few companies have a single person or organization primarily responsible for preventing fraud. Internal auditors mainly improve operational efficiency, not detect fraud. Security investigates and pursues reported fraud, but does not prevent or detect it.

10 Critical Thinking Errors

1. Sense of Entitlement

2. Being Overly Optimistic 

3. Rationalization

4. Peer or Financial Pressure

5. Instant Gratification

6. Diffusion of Harm

7. Lack of Remorse

8. Inadequate Fear of Punishment

9. Egoism

10. Disregard for Authority and Rules

Sense of Entitlement 

One of the most common critical thinking errors. Believing you are entitled to the proceeds of a crime; thinking you are only taking what you are owed. 

Being Overly Optimistic

Never presuming you will be caught, so there is no barrier to engaging in fraudulent behavior. Don’t properly assess the risk of being caught or the consequences. 

Rationalization

Finding a way to justify your actions and the fraud. Making excuses for illegal actions; often blaming the fraud on your employer.

Peer or Financial Pressure

External pressures, differ from case to case.

Instant Gratification

Seem unwilling to work hard and earn rewards, take shortcuts to get results quickly. 

Diffusion of Harm

Thinking your fraud is diffused because you are stealing small amounts from many firms, not a large amount from one company.

Lack of Remorse

The absence of remorse indicates a detachment from moral principles and ability to continue illegal acts without feeling guilt.

Inadequate Fear of Punishment

Feeling like even if you get caught, the punishment is not enough of a deterrent to keep you from committing fraud.

Egoism

Involves heightened sense of pride, seeing fraud as a challenge, gaining satisfaction from getting away with the crime, believing you’re smarter than your victims.

Disregard for Authority and Rules

Creating your own authority, believing rules do not apply to you.