There are several reasons why a company may choose to carry out a fraud risk assessment. When talking about fraud risk assessment, we remember that regulatory compliance today is an important part of business. When talking about fraud risk assessment, we remember that regulatory compliance today is an important part of business, not only in terms of the penalties imposed on organizations in the event of non-compliance, but also in the sense of offering security to clients, investors and others. stakeholders , creating uniformity in the market. This is how the term came about compliance , of the need to discipline compliance with standards within an organization in order to evolve in an ethical and responsible manner.
With the objective of ensuring that companies comply with regulations and laws, over the years, the compliance created major pillars of support, seeking to adopt a preventive stance against illegal acts and, consequently, contemplating the values of companies: transparency, integrity and ethics. We can cite as an example the continuous monitoring of organizational operations, which helps to mitigate risks and develop improvement solutions for company activities.
Communication and the definition of standards of conduct have become critical success factors for compliance and risk prevention programs. According to experts in compliance , just defining a code of conduct is not enough. It is also necessary to make frequent presentations and remind those involved of the content established by the code. It is therefore extremely valuable to search for innovative ways to make people aware of the form of conduct that is expected, as well as the collection and monitoring of compliance with the code at the internal and external levels of organizations.
Taking into account that to train conscious employees, companies rely on frequent training, it is worth highlighting the importance of collecting information from all departments of the company before the creation of the code of conduct, in addition to the commitment of the board of directors and acceptance of the rules. The creation of reporting channels and risk management areas are also listed in most expert recommendations. A good policy is not enough compliance , if it is poorly recognized by top management and is not kept alive through effective internal actions.
Given the current situation in our country, it is essential for companies to ensure that the rules of compliance established with partners are complied with. Not only aimed at the main objective, which is the fight against corruption, fraud and conflict of interest, but also to guarantee greater integrity and credibility to contractual relations, including demonstrating to the market the company's concern for ethics and compliance.
Adopt a system or procedure of compliance goes far beyond the protection of the Anti-Corruption Law. It also provides benefits for companies that do not need special government licenses or do not intend to participate in tenders, and are useful for the effective management of an organization.
Aspects of fraud detection Different fraud schemes can have a significant impact on a company's financial operation, cash flow, and public reputation. Most fraudsters don't start their illegal ventures with the intention of getting caught. Generally, they are fully aware of the consequences of their actions and the risks they are placing on their careers, reputations, and in some cases, freedom. However, under the circumstances, the perceived rewards of financial gain and status outweigh the risks of getting caught.
Studies show that there is a paradigm known as the fraud triangle. The paradigm consists of three key elements that are generally present for a fraudster to commit their wrongful act — opportunity, pressure, and rationalization. Generally in occupancy fraud schemes, the perpetrator has the pressure and opportunity to commit the fraud, all they expect is a reason to get them to act. The reasons can be based on many factors — need for additional income, financial difficulty, search status, addiction (drugs or gambling), or some other form of rationalization and validation that they're doing the wrong thing for the right reasons.
From a detection standpoint, 'why' and 'when' are generally less important than 'how'. Of course, discovering fraud can be a very difficult process, since, initially, the author is the only one aware of the occurrence of the fraud and, generally, has no intention of surrendering himself. Therefore, from the outside, it is not only necessary to find out that there is fraud, but also how it is taking place and who is responsible for it. While organizations may be vigilant in trying to prevent or detect fraud in its earlier stages, attackers often manipulate information aggressively and use various techniques to cover their trail.
So the question becomes: “How is occupational fraud discovered and how can it be prevented”? And the answer isn't exactly what most people would expect or want to hear.
Contrary to what many think, most occupational fraud schemes are not detected as a result of work carried out by internal or external auditors. Instead, they are usually discovered through tips. Generally, these tips come from other employees of the organization, but it's not uncommon for people outside the organization, such as customers, suppliers, shareholders, and even the organization's own competitors, to leave a useful tip.
One of the main problems for those who report a suspected occurrence of occupational fraud is who must also report it when they suspect and/or discover the fraud. The answer is — it depends. Most people tend to communicate information to their direct supervisor because they are often the first resource they seek when they have a problem. However, depending on the department where the fraud is discovered, the organizational level of the employee who commits it, and various other variables involved in the fraudulent activity, it may be inappropriate to transmit the information to your direct supervisor.
As with any other aspect of the business, there are risks and occupational fraud is no different. So, from an organizational perspective, the question becomes: What amount of risk is your organization willing to assume and what can be done to minimize that risk?
The primary consideration in evaluating fraud risk is that the longer an occupational fraud remains undiscovered, the greater the risk and size of a financial loss. It is important to know how occupational frauds are detected and reported, as this helps design and strengthen an organization's anti-fraud controls. It is also useful to design, review, and update organizational policies and procedures related to the detection of occupational fraud within an organization. Organizations that are proactive can reduce the risk of occupational fraud and the resulting financial loss. Additionally, they may be able to stop and detect fraud schemes faster than organizations that are reactive to adapt their controls, policies, and procedures to the ever-changing business world.
When to conduct a fraud risk assessment There are several reasons why a company may choose to carry out a fraud risk assessment. Here are a few reasons why your business or non-profit organization would hire an experienced forensic accountant to perform a fraud risk assessment:
Establish a fraud monitoring program An assessment can be an effective first step in the design and implementation of any fraud risk management program, such as overseeing integrity monitoring. For example, a fraud risk assessment will identify areas inherent to risk, assess the likelihood that a particular fraud scheme can be carried out, and identify improvements in internal controls.
Establish an ethical culture A fraud risk assessment can be used to establish a company-wide culture that promotes best practices in fraud prevention and detection. For example, a fraud risk assessment can create an environment for employees to talk to management and co-workers about detecting potential wrongdoing without the threat of punishment or repercussions. It can also promote better communication channels and workflow between employees.
Identify areas for further investigation When investigating suspected fraud, a fraud risk assessment of the areas or departments affected by the fraud can be used to identify the fraud schemes that are most likely to be carried out in those areas or departments of the company. An experienced forensic accountant can adapt the scope of the investigation based on previously identified fraud schemes and the current control environment in the relevant areas or departments.
Proactive approaches to fraud prevention Fraud prevention is a well-researched topic, and for good reason. Business owners want to keep their organizations safe and secure. They want to be able to trust their employees. They don't just want to react to fraud, they want to be proactive and prevent it.
When talking about fraud, there must always be a disclaimer that there is no 100% fraud prevention method out there. If you have an employee determined to steal your company, they'll probably find a way to do it eventually. But you can make it difficult to commit fraud (or other crime) and certainly make it easier to detect and respond to an incident.
So while there may not be a way to completely stop fraud, there are ways for your organization to be proactive and minimize your risk. Below are four indicated ways to help prevent or stop fraud:
1. Perform an internal audit and/or internal control assessment An internal control assessment takes place when third parties assess your organization's risk areas. Once these primary areas are identified, they go through the gaps in your internal controls, provide examples of how someone could exploit those specific gaps, and then create a resolution program to fill those gaps.
Third parties also assist in implementing additional controls and perform regular tests to help ensure adherence of the controls. You might be surprised to discover the seemingly minor risks employees take without realizing the potential consequences.
Often, we see blank checks on top of files, inventory that hasn't been blocked, or access to financial systems hasn't been protected. Payroll is another major area of risk, especially in small organizations. If the payroll employee pays the payroll for everyone, including himself, he can manipulate his own salary.
It is suggested to apply segregation of duties, significant management review, or even access controls on bank websites, as internal controls can provide the necessary oversight to help prevent misappropriation.
2. Use data analysis tools One of the fastest ways to check if something is happening in your organization is to use data analysis. TATICCA uses tools to examine an entire population of transactions for its clients. It also uses the information created by the organization in the normal course of business, which is more effective than the sample test, because it uses 100% of the data, even in large environments.
The data may come from different systems or be in different formats and can be analyzed to help identify errors and process flaws, as well as fraud. For example, if you want to investigate whether any of your employees have registered as a supplier and are paying for services not performed, the tools can obtain a list of employee names, addresses and reconcile with your list of suppliers. Or if you want to see if any of your sellers are promoting sales at the end of the month to meet sales targets, TACTIC can use tools to examine the full sales ratio and identify the date and the seller of any potentially suspicious transactions to guide a further investigation.
3. Perform insurance reviews A great way to be proactive is to ensure that you have adequate insurance coverage. We often see that organizations have an insurance policy, but when it comes to renewal, they don't take a close look at whether it still meets their needs.
If you face fraud or other disasters at a level of business interruption, your insurance provider can reimburse you for lost income while you're on low. However, if your business has grown significantly since you first purchased your insurance policy, you may not get what you deserve. Your loss will be measured based on the policy coverage limit currently in effect. If that limit isn't high enough to cover your current sales volume, your payment may be lower than it should be. In addition, in the event that fraud occurs in your organization, there is insurance coverage, such as employee theft coverage, that can help recover part or all of what was taken.
However, the limits of those policies also need to be reviewed because once the policy limits are reached, there's a low probability that you could recover additional funds from the fraudster. Without reviewing your coverage beforehand and analyzing the worst-case scenarios you may face, you could be underestimated when disaster strikes.
Don't forget that extra expenses may occur due to losses, which may or may not be reimbursed. If your place of business burned down, would it be necessary to obtain a temporary space and start paying a second rent payment? Will you continue to pay your employees so that you still have them when you reopen? These are the types of considerations to look at when deciding if you need extra coverage.
4. Perform contract compliance audits Are your suppliers adhering to the terms of your contract? A contract compliance audit can be discovered if suppliers are not charging according to the agreed rates or above the agreed amount.
A TATICCA Allinial Global Brazil frequently reviews payment applications and vendor invoices to determine contract compliance. Contract compliance is especially a concern for companies with million-dollar contracts in place.
While these companies may or may not have the time or manpower to audit contract compliance, they certainly want to ensure that they are paying/receiving what they should, according to what they signed. We have an experienced and multidisciplinary team that can verify the compliance of your contract.
Get in touch with TATICCA Allinial Global Brazil , which provides integrated auditing, internal auditing, accounting, tax, corporate finance, financial advisory, risk advisory, technology, business consulting and training services, for more information, at www.taticca.com.br or e-mail taticca@taticca.com.br and learn more. Our company has certified methodologies for carrying out activities.
