Managing the Risk of Internal Fraud: Be Proactive

This article was originally published in French on Droit-Inc.com on March 10, 2016 and has been reproduced with permission.

Fraud is alive and well in Canada and throughout the world. From the collapse of Enron to frauds like Earl Jones in Quebec, many scandals have been well-publicized over the last number of years. Fraud-related articles and cases seem to be ever-present in the daily news. The publicity which ensues can sometimes significantly impact the reputations of companies and individuals and, larger frauds have even led to the downfall of entire organizations. As a consequence, legislation and regulations have grown, increasing substantially management’s responsibility for fraud risk. And yet, daily, we continue to hear about large frauds occurring throughout the world.

This leads us to the question: Can fraud risk be managed?

Can Fraud Risk be managed and how can professionals assist?

All organizations, no matter the size, are susceptible to fraud. In order to understand fraud risk management, it is important to differentiate between the types of financial fraud which are often categorized as follows: Internal, External and Fraud against individuals. The focus will be on Internal Fraud management for the purpose of this article.

What is internal fraud? It can be defined in many ways. The Association of Certified Fraud Examiners defines it as: “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the organization’s resources or assets.” Simply, this type of fraud occurs when an employee, manager, or executive commits fraud against his or her employer.

Unfortunately, there is no limit to the types of fraud to which an organization may be exposed; perpetrators are forever creative and inventive. It is best to be equally imaginative in devising strategies to protect the organizations. A sample of some of the areas commonly exploited in internal frauds are: payroll fraud, expense reimbursement fraud, billing fraud, check tampering, cash larceny and non-cash asset misappropriation.

It is commonly believed that there are three interconnected factors when employees commit internal fraud; motivation, opportunity and the ability to rationalize the fraudulent behaviours.

Although motivation and rationalization are generally not within the control of an organization or would be more difficult to control, the opportunity to commit fraud can be contained. Many of the most effective anti-fraud controls are being overlooked by a significant number of organizations. Controls — including surprise audits and formal fraud risk assessments— have resulted in substantial reductions in cost and duration of fraud damage.

Sound anti-fraud policies incorporated into a well-structured anti-fraud framework as well as clear and strong ethical leadership are a solid start in the fight to reduce fraud risk. Elements such as fraud awareness, conflict disclosure, reporting procedures and whistleblower protection as well as corrective actions need to be well understood and documented. All of these elements can be incorporated into a proper control system with proper oversight.

In conclusion, although top management is ultimately responsible for protecting the organization’s assets and resources, they often look to their external professionals for assistance in this regard. Cooperation between legal counsel and forensic accountants has played a crucial role in assisting organizations with their fraud risk management by encouraging awareness of fraud risk and by helping to develop mechanisms to detect and deter fraud. This is a case where an ounce of prevention is worth a pound of cure.

To learn more, contact Corey Bloom, CPA, CA, CA-IFA, CFE, CFF, Business Advisor, Forensics and Litigation Support Services, at 514.228.7863 or [email protected]