FRAUD PREVENTION TECHNIQUES

Table of Contents Introduction Financial Statement Fraud Fraud Prevention Fraud Detection Anti Fraud Policies Organisation Financial Policies Role of the Audit Committee Conclusion

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FRAUD PREVENTION TECHNIQUES

Introduction to Fraud
Activities undertaken by an individual or company that are done in a dishonest or illegal manner, and are designed to give an advantage to the perpetrating individual or company. Corporate fraud schemes go beyond the scope of an employee's stated position, and are marked by their complexity and economic impact on the organisation, other employees and outside parties. Fraud can be categorised under three broad headings: Internal Fraud: Perpetrated by management or employees - this is the most common form of fraud found in organisations. Where the fraud is perpetrated by someone outside the organisation. This could include the targeting of your organisation by organised criminals. Fraud perpetrated with the cooperation of an inside employee and an outsider. This is one of the most difficult frauds to recognise.

External Fraud:

Corruption or collusion:

Financial Statement Fraud

This type of fraud is characterized by intentionalmisstatements or omissions of amounts or disclosures in financialreporting to deceive financial statement users. More specifically, financialstatement fraud involves manipulation, falsification, or alteration ofaccounting records or supporting documents from which financial statementsare prepared. It also refers to the intentional misapplication ofaccounting principles to manipulate results. According to a study conductedby the Association of Certified Fraud Examiners, fraudulent financialstatements, as compared with the other forms of fraud perpetrated bycorporate employees, usually have a higher dollar impact on the victimizedentity as well as a more negative impact on shareholders and theinvesting public.

Fraud Prevention
Managing the risk of fraud should be a high priority for all organisations although often, unfortunately, the real risk of fraud is not even considered. It is important that there is a highly visible and consistent approach to fraud prevention in order that a culture of zero tolerance can be emphasised to all employees.
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FRAUD PREVENTION TECHNIQUES We can help in this regard by assisting with the preparation of a suitable anti-fraud strategy which can be communicated to all employees. We can also ensure that the systems that you have in place to prevent fraud are robust and are not being compromised in any way. Whilst we could never certify that fraud is not taking place, we can help to ensure that the possibility of fraud remaining undetected is minimised.

Fraud Detection
As a follow on to the prevention and awareness work that can be undertaken and also assist with fraud detection within organisation. It is fact that some 5% of organisation income is lost through fraud and orgnisation must accept the possibility that it is already happening. As part of the prevention process sometest can be done to organisation systems and processes in addition to undertaking a detailed analysis of organisation costs and expenses for "reasonableness". In most organisations fraud involves the inflation of expenses or the reduction of sales income which in both cases can have a dramatic effect on your bottom line profit performance.

Anti Fraud Policies

There are various forms of policy that can help organisation in the fight against fraud. At the very least organisation should have:
y y y y

A Code of Conduct An Anti-Fraud Strategy; A Fraud Response Plan; A Whistle-blowing Policy.

Policies alone, however, cannot ensure that the appropriate controls to prevent employee fraud are maintained. It is extremely important to communicate to all staff that fraud will not be tolerated. This is only achieved by taking action and not condoning low-level fraud, for example petty pilfering of stationery or the inflation of business expenses. The anti-fraud culture must be endorsed and followed at all levels meaning that it applies to managers and high-achievers just as much as any other employee.

Organisation Financial Policies

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FRAUD PREVENTION TECHNIQUES Financial policies and procedures enable an organization to see eye to eye with investors and regulators on the most important aspects of sound record-keeping. These policies draw on various accounting standards, the most important of which include ASX guidelines and AASB. 1. Record-Keeping o Record-keeping policies and methodologies help a company spot pain points in the way bookkeepers convert economic events into financial data summaries. These policies also help senior accountants identify and prioritize issues that intertwine financial management, accounting and ratio analysis. For example, accurate journal entries produce errorfree financial statements, enabling investors to perform relevant reviews of performance metrics. Record-keeping policies tell bookkeepers when to debit and credit financial accounts, how to post law-abiding journal entries, errors to avoid and the reconciliation process to uncover inaccuracies. Financial accounts range from assets and equity items to revenue components, liabilities and expenses. Fraud Prevention
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Fraud prevention enables a business to avoid the hefty operating losses that often result from inadequate internal controls, poor employee training and adverse regulatory pronouncements. The idea is to set proper financial policies to prevent lingering inefficiencies in the way the company does business and deter fraudulent intent in the workplace. A control is a set of policies and procedures a financial manager puts into place to avert operating losses, most of which may result from fraud, error, negligence and government fines and penalties.

Petty Cash Handling

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Petty cash is a small amount of money a company uses for minor, incidental expenses. These include payments for postage and lightduty office supplies. Petty cash handling is sometimes an exercise in financial management and fraud prevention, as it requires that an employee pay attention to specific criteria and policies to avoid money theft. These policies include keeping receipts for all disbursements, making one employee accountable for managing the cash, assigning a second level of oversight to another employee, reconciling the petty cash ledger periodically, and ensuring that cash outlays match disbursements financial managers record in the company's statement of cash flows.

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FRAUD PREVENTION TECHNIQUES Financial Reporting

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Financial reporting procedures and policies pertain to how an organization goes about gathering accounting information, checking for its accuracy and preparing complete financial statements. These procedures often help businesses recruit accounting talent. They reflect the fact that top leaders take the problem of inaccurate or fraudulent reporting seriously and are ready to go to great lengths to find experienced and competent accountants to improve the reporting process. Financial statements include a balance sheet, an income statement, a cash flow statement and an equity statement.

Role of the Audit Committee

The role of internal audit is to assist the board and/or its audit committee in discharging its governance responsibility by delivering: y A review of the organizations control culture, especially the tone at the top. y An objective evaluation of the existing risk and internal control framework. y Systematic analysis of business process and associated controls. y Review of the existence and value of assets. y A source of information on major frauds and irregularities. y Review of the compliance framework and specific compliance issues. y Review of the operational and financial performance. y Recommendation for more effective and efficient use of resources. y Assessments of the accomplishment of the company goals and objectives. y Feedback on adherence of the organisations values and code of conduct/ ethics.

Conclusion
Results of Poor Internal Control Inaccurate financial information, incorrect decisions & fraud Errors in Financial (P & L, B/H etc) &Non Financial information (KPI) Leads toPoor Decision making

Internal Controls and Accounting Systems

Internal control structure procedures established by an entity to control its trading and accounting operations Internal controls individual components of an internal control structure Internal control structures assist management by ensuring:
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FRAUD PREVENTION TECHNIQUES j The business in conducted in an orderly and efficient manner o Reduce duplication of work, wastage and inefficient use of resources o Adequate documentation system and flow channels required j Detection or prevention and correction of irregularities o Prevention of accidental or deliberate financial loss by adhering to established procedures & policies j Safeguarding of assets o Prevention of misuse, destruction or loss of assets j Accurate & timely financial reports for decision making Accounting systems- consist of : j j j j j Source documents Records Procedures Personnel and all data processing methods used to transform data into information for decision making

A sound system of internal control will ensure that accurate and reliable accounting records are produced on a timely basis. Responsibility for development of internal control structures rests with an organizations directors and management and is often based on cost versus benefit analysis Objectives of internal control Assist in the prevention of errors and fraud and ensure that all stakeholder receive timely and accurate information 1. Completeness Ensuring that all bona fide transactions are recorded 2. Validity Ensuring that the transactions are properly authorized and not fictitious or non existent 3. Accuracy Ensuring transactions are correctly valued, properly classified & recorded on a timely basis Three Basic elements of an internal control system
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FRAUD PREVENTION TECHNIQUES 1. Control Environment 2. Management information System 3. Control Procedures

Management information systems

An entity should be able to j j j j Identify, assemble and record all valid transactions and data Classify, summarise and report info on a timely basis Allocate info into the appropriate accounting period Report transactions in accordance with general accounting principles and stat. Requirements j Provide management reports

Control Proceedures
j j j j j j Segregation of duties Proper authorization Proper documentation and records Controls over access Reconciliations Independent internal checks

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