fraud prevention hanna c quffa cpa, cfe. auditing vs. fraud examination issueauditing fraud...
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Fraud Prevention
Hanna C Quffa CPA, CFE
Auditing vs. Fraud ExaminationIssue Auditing Fraud Examination
Timing Recurring Nonrecurring
Presumption Professional Proofskepticism
Objective Opinion Affix blame
Scope General Specific
Relationship Nonadversarial Adversarial
Methodology Audit techniques Fraud examinationtechniques
Defining Occupational Fraud and Abuse
The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets
Elements of Fraud
A material false statement Knowledge that the statement was false
when it was uttered Reliance on the false statement by the
victim Damages resulting from the victim’s
reliance on the false statement
Opportunity
Pressure Rationalization
Fraud Triangle
Major areas of exposure
corruption, which includes conflicts of interest, bribery (including kickbacks), illegal gifts, and economic extortion;
misappropriation of assets, which includes skimming, larceny, and asset misuse; and
financial statement fraud, which can include financial (either asset or revenue over- or understatements) and non-financial components
Prevention VS Detection
An ounce of prevention is better than a ton off treatment
In order to prevent fraud there is a need to make your organization immune against fraud
Reducing the risk of fraud
The means to reduce riskPrevention
Reduce the opportunity for Deterrence (punishment) Detection
Detection of fraud is much more costly
Responsibility of Fraud Prevention
Management has the responsibility and means to implement measures to reduce the risk of fraud Good corporate
governance reduces the risk
Elements of prevention
Create and Maintain a culture of honesty and high ethics
Evaluate the risk and implement policies, procedures, and controls to mitigate the risk and reduce the opportunity
Develop appropriate oversight processes
Create a culture of honesty
Setting the tone at the top
Positive work place environment
Hiring & promoting appropriate employees
Training
Conformation
Discipline
Setting the tone at the top
Lead by example (words and actions) Management has to
Behave EthicallyCommunicate it’s intolerance for dishonest
and unethical behavior Employees must be treated equally with
disregard to position
Setting the tone at the top
Set achievable financial goals (not to create undue pressure)
Create a code of ethics and implement it
The code of ethics should be clear, understandable and developed in a positive participatory manner
Code of conduct
The code of conduct should reflect the core values of the entity and guide employees in
making appropriate decisions during their workday.
The code of conduct might include such topics as ethics, confidentiality, conflicts of interest, intellectual
property, sexual harassment, and fraud.
Code of conduct
Employees should be given the opportunity to help in development and updating of code of conduct to create ownership
Employees should be encouraged to report violation of code or wrong doingA hotline (anonymous is preferred to avoid
fear or retribution )
Positive work place environment
wrongdoing occurs less frequently when employees have positive feelings about an entity than when they feel abused, threatened, or ignored
Without a positive workplace environment, there are more opportunities for poor employee morale, which can affect an employee’s attitude about committing fraud against an entity
Factors that detract from a positive work environment Top management that does not seem to
care about or reward appropriate behavior Negative feedback and lack of recognition
for job performance Perceived inequities in the organization Autocratic rather than participative
management
Factors that detract from a positive work environment cont. Low organizational loyalty or feelings of ownership Unreasonable budget expectations or other financial
targets Fear of delivering “bad news” to supervisors and/or
management Less-than-competitive compensation Poor training and promotion opportunities Lack of clear organizational responsibilities Poor communication practices or methods within the
organization
Factors that help create a goodenvironment Recognition and reward systems that are in tandem with
goals and Equal employment opportunities Team-oriented, collaborative decision-making policies Professionally administered compensation programs Professionally administered training programs at all
organizational levels Career development A good HR Department is instrumental
Hiring & promoting appropriate employees Hire the best sited for
the job with integrity Equivalence of effort
to reward Promotion biased on
evaluation
When people are under pressure and there is a perceived opportunity some people will behave dishonestly rather than face negative consequences of honest behavior
Proactive hiring and promotion procedures Conducting background investigations on individuals being
considered for employment or for promotion to a position of trust Thoroughly checking a candidate’s education, employment history,
and personal references Periodic training of all employees about the entity’s values and code
of conduct, (training is addressed in the following section) Incorporating into regular performance reviews an evaluation of how
each individual has contributed to creating an appropriate workplace environment in line with the entity’s values and code of conduct
Continuous objective evaluation of compliance with the entity’s values and code of conduct, with violations being addressed immediately
Training
New employees should be trained at the time of hiring about the entity’s values and its code of conduct.
This training should explicitly cover expectations of all employees regarding Their duty to communicate certain matters; A list of the types of matters, including actual or
suspected fraud, to be communicated along with specific examples;
Information on how to communicate those matters.
Training Cont.
The training should be at the time of hiring as well as refresher training periodically
Training should be specific to an employee’s level within the organization, geographic location, and assigned responsibilities.
Confirmation
Management needs to clearly articulate that all employees will be held accountable to act within the entity’s code of conduct. All employees within senior management and the finance function, as well as other employees in areas that might be exposed to unethical behavior (for example, procurement, sales and marketing) should be required to sign a code of conduct statement annually, at a minimum.
Discipline
The way an entity reacts to incidents of alleged or suspected fraud will send a strong deterrent message throughout the entity, helping to reduce the number of future occurrences.
The consequences of committing fraud must be clearly communicated throughout the entity.
Response to an alleged incident of fraud
A thorough investigation of the incident should be conducted.
Appropriate and consistent actions should be taken against violators.
Relevant controls should be assessed and improved.
Communication and training should occur to reinforce the entity’s values, code of conduct, and expectations.
EVALUATING ANTIFRAUD PROCESSES AND CONTROLS Fraud can not occur without a perceived
opportunity to commit and conceal the act. Organizations should be proactive in reducing
fraud opportunities by (1) Identifying and measuring fraud risks, (2) Taking steps to mitigate identified risks, and (3) Implementing and monitoring appropriate preventive
and detective internal controls and other deterrent measures.
Internal Control
Feed forwardFeed back
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Controls
Existence of a control even if non- operational can be a deterrent and act as a real control
DEVELOPING AN APPROPRIATE OVERSIGHT PROCESS Audit Committee or Board of Directors Management Internal Auditors Independent Auditors Certified Fraud Examiners
Audit Committee’s purpose
To monitor compliance with laws Integrity of financials Asses external auditor qualifications &
independence Follow up on internal audit
Thank you