Fraud Prevention and Management Recommendations free essay sample

The purpose of this Fraud Prevention Plan is to set out the approach to dealing with fraud risk within our organization. In order to prevent the types of frauds that have already occurred within our organization it will be necessary to create â€Å"a culture of honesty, openness, and assistance†¦.. fraud prevention is where the big savings occur† (Albrecht, Albrecht, Albrecht, Zimbelman, 2012, p. 03). What is required is the implementation of a comprehensive hiring, fraud, and ethics training program with strong controls, with punitive treatment of fraud offenders. â€Å"Research confirms that anyone can commit fraud. Fraud perpetrators usually can’t be distinguished from other people on the basis of demographic or psychological characteristics. † (Albrecht et al. 2012, p. 33). The value of an effective fraud prevention program requires several components. The lack of fraud prevention leads to enormous risk. The corporation will need to install processes and controls to ensure that honest people are hired. When candidates are going through our interview process they will need to be thoroughly vetted on the accuracy of their work history, education, and stated accomplishments. In addition to the standard practiced of contacting references provided by the candidate, these referenced individuals will be asked to provide additional references. The result of checking references provided by the initial reference will in many instances allow for greater insight into the true character of the candidate. The Director of Human Resources should investigate the potential of having a pre-employment Business Ethics Assessment completed and evaluated for each potential new employee. The assessment will measure each candidate for knowledge of the application of ethical principles in various workplace situations, such as whistle-blowing, conflicts of interest, policies, ethical issues, and honesty (SHL Global, 2012). Consistent use of such assessments pre-hire will enable the firm to hire the most honest people. Criminal and credit history background checks are a critical component to our proposed fraud prevention plan, enabling the firm to identify â€Å"high risk† individuals prior to extending an offer of employment. In addition to stringent hiring practices the corporation will institute a fraud awareness training program for all employees as part of our efforts to create a â€Å"low-fraud atmosphere†. (Albrecht et. al. 2012, p. 103). Senior management must establish a positive work environment by creating a formal code of conduct that sets the expectation for high ethics, stating what is and is not acceptable within our enterprise. Section 406 of the Sarbanes-Oxley Act of 2002 is a â€Å"Code of Ethics for Senior Financial Officers† that requires that every public company to create, disseminate to all employees, and religiously enforce its ethical code (Albrecht et. al. 2012, p. 107). Ideally the Code of Ethics should be reviewed and signed by all employees on an annual basis. Albrecht et al. (2012, p. 106) provides an example of a company issuing small cards to every employee to carry on their person. The card lists several reporting options for employees who suspect fraud is taking place. One of the options to report suspected fraud is for employees to contact an external, anonymous ‘hotline’ to communicate their suspicions. These actions combined with regular messages on fraud awareness and non-tolerance will help to decrease our incidents of fraud loss. Executive and mid-level managers need to create and preserve an open-door policy as an important element to assist in our fraud avoidance program. Easy access (open door) policies prevent fraud and allow managers to become aware of employee pressures and their possible rationalizations that contribute to fraudulent activities. Many times employees commit fraud because â€Å"they feel they have no one to talk to† (Albrecht, et. al 2001, p. 111). Management must be open to honest discussions with employees about issues concerning the employee, and be ready to recommend counseling or an approved corporate Employee Assistance Program (EAP). EAP’s can help troubled employees with problems caused by gambling, substance abuse, money issues, health, family, and other pressures that enable them to rationalize fraudulent activities. A good internal controls system will prevent the type of fraud the firm has previously experienced. According to the Committee of Sponsoring Organizations (COSO), the CEO has ultimate responsibility for any internal controls system. â€Å"More than any other individual, the chief executive sets the tone at the top that affects integrity and ethics and other factors of a positive control environment† (COSO, 1992). The control environment will set the overall tone of the organization that is established by senior management and runs throughout the management structure. A good accounting system is another important element of the control system to provide timely information used for decision-making. The Internal Auditor, Audit Committee, Director of Corporate Security, and Corporate Legal Council will need to work together to identify methods to assess risk and implement the appropriate controls. Basically there are only five types of control activities: segregation of duties, authorizations, physical controls, independent checks, and documentation† (Albrecht et. al. 2012, p. 114). The first three controls are preventative controls while independent checks and documentation are detective controls. Once established these controls need to be monitored and tested regularly for effectiveness. Had these controls been in place earlier the recent fraudulent activities of inventory theft, kickbacks, and enhanced earnings might have been prevented, or at least been identified earlier resulting in a reduced loss to the firm. The company has experienced prior internal control weaknesses, which strongly contributes to creating a high fraud environment. â€Å"When internal controls are absent or overridden, the risk of fraud is great† (Albrecht et al. 2012 p. 143). The Director of Internal Audit working closely with the Audit Committee can create and implement internal controls consisting of the control environment, accounting system, and control procedures. Aspects of the internal controls will be segregation of duties, physical safeguards, independent checks and monitoring, proper authorizations, documents, and records working in conjunction with a robust accounting system. Resilient internal controls are an important deterrent to fraud. Strong internal control can prevent or detect most types of misappropriations of assets and fraudulent financial reporting. Some examples of internal controls are mandatory vacations and job rotations, surveillance techniques, management review, segregation of duties, password protection on computer files, and physical safeguards on physical assets. An information system with a poor audit trail provides opportunities to conceal fraud. Audit trails need to be incorporated in our internal control system. â€Å"Close monitoring facilitates early detection† (Albrecht, et. al. 2012, p. 118) and can discourage fraudulent activities as employees realize they are being monitored and are loath to be exposed as being a thief. Similarly, having a monitoring system combined with a â€Å"whistle blowing† program will allow the organization to detect frauds early while losses are minimal. Our whistle blowing system needs to provide for anonymity, be easily accessed by employees, and ideally be managed by an independent entity, i. e. legal counsel or an outside third party organization. Finally the whistle blower program will feature prompt follow up on all reported frauds with corrective action implemented promptly to encourage additional use of the program. One of the most important factors of our program to eliminate fraud is the expectation of severe punishment. â€Å"One of the greatest deterrents to dishonesty is fear of punishment† says Albrecht. Simply terminating the offender is not significant as â€Å"real punishment involves having to tell family members and friends about the dishonest behavior† (Albrecht, et. al, 2012, p. 119). Legal Counsel must develop a robust prosecution policy that is publicized to all employees frequently about how unauthorized borrowing or theft of company assets will not be tolerated. These publications need to be depersonalized to disguise the identity of the perpetrator(s), to avoid potential slander and/or libel litigation (Albrecht et al. 2012 p. 123). The best way to prevent negative stories in the media is to avoid frauds in the first place. â€Å"A good Code of Ethics combined with a strong policy of punishment helps eliminate rationalizations† Albrecht states, and will prevent the frauds and resulting negative publicity the Board of Directors wishes to avoid. However all of the above actions need to be enhanced by proactive fraud auditing. Fraud auditing activity will create awareness in employees that their activities are subject to review at any time. A vigorous fraud auditing program involves four major steps: (1) identifying fraud risk exposures, (2) identifying the fraud symptoms of these exposures, (3) building audit programs to proactively search for symptoms and exposures, and (4) investigating fraud symptoms identified. A comprehensive approach to create programs and policies that prevent fraud require an understanding of the Fraud Triangle (Albrecht, et. al. 2012, p. 34) and the motivations that cause employees to commit theft. Engaging policies to prevent fraud will require a commitment starting from senior management and integrating throughout the organization. Management needs to establish a widely publicized policy of being notified when an employee who is not prosecuted for committing fraud, versus being notified only when an employee is being prosecuted. Senior managers must be the leaders of ethical behavior. â€Å"Top management cannot accept expensive perks and gifts from vendors and others and not expect employees to do the same† (Albrecht et al. 2012, p. 123). Employees must see that managers are setting the example for fraud avoidance. They need to be aware that management from the Board of Directors, top and middle managers, and control groups such as auditing committees, Corporate Security, and legal / regulatory compliance managers consider fraud avoidance a high priority. Significant time and resources need to be directed to instituting a comprehensive fraud education initiative that includes not only our internal workforce but also all vendors. Our plan should be reviewed consistently, especially after significant industry or corporate events such as layoffs, a hiring surge, or significant growth). The most comprehensive fraud prevention plan can be overtaken by fluctuations in the enterprise environment if the plan’s effectiveness isn’t regularly monitored and adapted to these changes. Monitoring via internal and/or external auditors, combined with education and whistle blowing programs will create a low fraud tolerance environment. â€Å"Employees and vendors who know that an effective monitoring and reporting system is in place are much less likely to commit fraud than are individuals who work in high fraud environments† (Albrecht et al. 2012, p. 123). Reporting discovered fraud activity to management will include Corporate Security, the Audit Committee, and the Human Resources Director, with notifications to the CEO and Legal Counsel. When fraud is reported or otherwise discovered the lead investigators will be assigned by the Director of Corporate Security working in conjunction with the Director of Internal Audit. Once the investigation is complete and a fraud event has been confirmed, a strong prosecution is recommended. Possible referral to the appropriate law enforcement agency(s) will be considered. The single greatest factor in deterring dishonest acts is the fear of punishment† Albrecht et al. 2012 p. 124). It is not possible to have a â€Å"zero fraud† environment. Stealing inexpensive office supplies is fraud. Due to the low costs these frauds are not considered seriously. However, once a fraud is perpetrated without a reaction the fraudster will continue to commit more frauds of ever-increasing magnitude. Albrecht et al. 2012 states â€Å"gone are the days when prosecution resulted in adverse publicity. Most people realize that fraud exists in every organization. (p 124). Should fraudulent activity be revealed and an investigation launched by Corporate Security and/or Internal Audit managers, there are four types of evidence that should be accumulated (Albrecht et al. 2012, p 80). This evidence may include testimony gathered from employees via interviews, interrogations, and honesty tests. Documentary evidence will include written or electronic materials. Physical evidence such as letters, purchase orders, shipping and inventory records, and any other tangible items associated with the dishonest acts. Finally personal observation of suspected fraudsters may be incorporated by the investigators (invigilation, surveillance, and covert operations) to augment the legal case against the perpetrator(s) of the fraud. Albrecht et al. (2012) cautions â€Å"because of the sensitive nature of fraud investigations, fraud investigators must exercise extreme care in how investigations are conducted, who knows about the investigations, and the way investigations are described. † Predication must exist before any fraud investigation is initiated. The goal of any fraud is to uncover the truth, and to confirm or deny if the suspicions of fraud are accurate. The potential for a suspected fraud to be an unintentional error or mistake by an employee is significant enough to avoid hasty conclusions without a vigorous investigation to confirm the facts of the suspected fraudulent activity. Disciplinary action may be taken against employees who are confirmed to have failed to comply with the company Code of Ethics, or violated any applicable law or regulation (American Express, 2006). Disciplinary measures will depend on the circumstances of the violation and will be applied in a manner consistent with the Company’s policies and/or any applicable laws. Termination is an option as is civil or criminal prosecution. In order to avoid false accusations, consideration will be given to whether or not a violation was intentional, as well as to the level of good faith shown by an employee in reporting the violation or in cooperating with any resulting investigation. Clear communication will be provided affirming that punitive action will be taken against any employee who directly participates in, authorizes, directs, approves of, conceals, or deliberately fails to report actions that violate the Code or applicable law or regulations. In addition, persons who violate any law during the course of their employment may be subject to criminal or civil penalties, as well as payment of civil damages to the Company or third parties. Preventing fraud is more cost effective than trying to recover assets after the fact. According to the 2012 Report to the Nations study published by the Association of Certified Fraud Examiners (ACFE), a staggering 40 percent of organizations did not recover any of their losses (ACFE, 2012). An article in Business Finance in May 2008 (Skalak, 2008) stated that the average cost of one incident of fraud is $3 million. The three identified frauds committed within our organization can be estimated at $10 million. At a profit margin of 10% we would need an additional $100 million of top line revenue to recover from this theft! A fraud prevention plan, properly designed and implemented, will support our organization’s efforts to mitigate losses due to occupational fraud. These initiatives may not stop fraud from occurring altogether. However â€Å"organizations with active plans which include anti-fraud controls, report lower losses and faster detection† (Plante Moran, 2012). An effective fraud prevention program is crucial to our organization to enable the firm to deliver quality products and services to our clients, and to maintain the confidence of all stakeholders. The Board of Directors must understand the fraud and corruption risks that our business faces and ensure that effective measures are in place to prevent, detect and respond quickly and appropriately to fraud and corruption. A timely approval by the Board to implement this fraud prevention initiative is strongly recommended.