subject: Why Failing In Fraud Prevention Makes Us Easy Targets [print this page] There is no correct answer to the question of how much fraud protection is enough. Fraud will always happen no matter how much effort we put in. However, to ignore a few basic rules amounts to an open invitation to the fraudster that there are no effective fraud prevention measures in place.
Estimates put out by the Association of Certified Fraud Examiners in their Address to the Nation indicated that on average US companies lost 5% of their turnover to fraud. This wastage is more than many companies make as profit! Some estimates put the level of losses due to fraud in the UK at up to 100 billion. This could be likened to every employed person paying an additional £5,000 tax every year. We can see that there is so much fraud going on around us that fraud prevention measures are cleatrly not protecting us adequately.
For a business to reduce its risk of fraud, it must first have an anti-fraud culture. For example, if the work force sees the managers or owners of a business cut corners by paying suppliers 'cash in hand' to avoid Value Added Tax, they might also be tempted to be equally dishonest and falsify their expense claims.
So there must be a tone established from the most senior management that fraud or any financial impropriety will not be tolerated. This can be achieved by publishing a fraud policy document. Such a document may range from an expensive glossy brochure or booklet to a simple printed page of paper. What is important is that it sets out the organisation's position against fraud. It will detail what is acceptable behaviour to the firm and what is not. It should be circulated to everyone, and may even be supported by staff training sessions particularly for new starters. Setting out a robust stand against fraud can have a positive effect in reducing the likelihood of a fraudster targeting the business.
Many organisations will be audited every year and may hope that any fraud will be detected then. It may even hope that the auditors will advise how to protect themselves better against the fraudster. This is a mistaken belief because many frauds take place over one or more years and pass the audit process undetected.
The yearly audit, or alternatively the services provided by the accountants of the smaller business in preparing financial statements, is not for fraud prevention. It is true that weaknesses in accounting controls may be highlighted, only if they impact the likelihood of the true and fair nature of the accounts. However, the determined fraudster is seeking any loophole, that tiny chink in the armour, that will let him in to defraud unseen. A fraudster can wait until the audit is over and then devastate a business in a matter of days or weeks.
An ongoing review of the risk a business might be facing due to fraud is essential. Again this need only match the scale and complexity of the entity. Many public sector entities such as local councils and prime care health bodies are required by law to have fraud prevention reviews annually. These will be undertaken by internal auditors, internal fraud teams or contracted to approved outside consultants. They involve a review of all fraud related accounting controls within the organisation which results in an overall score being awarded. Then when reviewed by central funding authorities the public body may be judged against this score when seeking an increase in next year's budget.
Big private companies should employ similar tactics, and an ongoing review is just as important for the owner of a small business who can take some time to consider his security. By ignoring the need to be active in considering if a business is at risk from fraud puts that very business at risk, and sends out an invitation to the fraudster.
by: Mark Jenner
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