Who Me? Management as First Line of Defense Against Fraud
By Lauren Williams, CPA, Senior Manager, Johnson Lambert LLP
According to the Anti-Fraud Collaboration’s The Fraud Resistant Organization report (the report), 60% of individuals who commit fraud have worked at their company for five or more years. Given that the average fraud is detected within three years, one could assume that individuals typically do not join an organization intending to commit fraud. As the first line of defense, management plays a vital role in preventing and detecting financial reporting fraud from occurring.
Continue Reading from eInterpreter...
Management is responsible for implementing controls in an organization to deter and detect financial fraud. Although no organization is fraud proof, common characteristics among organizations that are more fraud resistant include an ethical tone at the top, exercising professional skepticism when performing job responsibilities and strong internal controls.
Ethical tone at the top is considered one of the best fraud deterrents. According to the report, organizations with strong ethical cultures are 10 times less likely to experience misconduct than those with weak ethical cultures. This indicates that employees are more inclined to do the right thing when they believe it’s what’s expected of them. Management’s role in setting an organization’s tone is communicating ethical expectations to employees and being a role model for acceptable conduct at the office. These communications and behaviors should be ongoing and consistent for the highest impact.
Professional skepticism means to have an inquiring mind, which increases the likelihood that fraud will be identified. An important byproduct of skepticism is that it boosts the perception among employees that fraud will be detected, thereby deterring them from attempting fraud in the first place. For example, management may conduct random monthly or quarterly reviews of support for checks or policies issued as a means of exercising professional skepticism.
Strong internal controls, in conjunction with anti-fraud training programs, play an integral role in decreasing the likelihood of fraud. Segregation of duties lowers the likelihood of fraud as collusion between two individuals is less likely to occur than misconduct by one person. The report shows that several commonly implemented internal controls help detect fraud sooner and at significantly lower losses:
- Code of conduct
- Formal fraud risk assessments
- Management review
- Data analysis
- Surprise audits
While management is crucial in preventing and detecting fraud, the board of directors, internal audit and any other groups involved in overseeing financial reporting must be engaged and understand their roles in the process, which leads to the highest level of fraud deterrence and detection. For more information on how these parties help to prevent and detect fraud, read The Fraud Resistant Organization.
For more information, contact Lauren Williams at email@example.com.