Evaluate Who Will Commit Fraud: Step 4 In Risk Management

Evaluate who will commit fraud. Which people and departments are most likely to commit fraud. Senior management of the organization is required to assess the fraud risks to which the organization is exposed. To appropriately assess the fraud risks inherent in business processes and departments, the management needs to look at the organization in the form of different departments and sub-departments, which collectively constitute the organization.

Evaluate Who Will Commit Fraud

Evaluate Who Will Commit Fraud: Step 4 In Risk Management

Assessing fraud risks in different departments enables the management to have a deeper inside into the operational activities of different departments, which also highlight individuals performing core activities. Such analysis highlights the areas where segregation of duties is a must or processes where controls are found as weak.

Every department is run by different employees, who usually work under the supervision of one departmental head, for example, the Finance department is headed by the Chief Financial Officer (CFO), and the CFO is provided with a finance team to ensure that financial transactions are recorded accurately and timely in the financial system or financial statements of the company. 

CFO being the finance process owner is mainly responsible for identifying the fraud risks in the financial system with the help of his finance team.

CFO must analyze the roles and responsibilities of his finance team, especially those performing crucial processes, such as Fixed Assets recording, payment authorizations, etc. These processes where funds or authorization of funds are involved usually carry more elements of fraud risks as compared to ones where no inflow and outflow of funds are involved.

Sales Department

Similarly, the Sales department is headed by the head of sales who runs the sales department with his sales team. The sales head is required to identify the fraud risks in the sales department to ensure that any possible sales-related fraud risks are identified and mitigated on a timely basis. 

A typical manufacturing organization consists of the following departments:

  • Production
  • Supply Chain Management, including procurement
  • Business and Sales
  • Marketing
  • Finance
  • Operations 

All the above departments have different objectives, processes, and internal controls. It is the responsibility of each departmental head and employee working in such a department to identify and report fraud risks or fraudulent activities.

Management needs to assess the incentives and pressures to identify individuals and departments that are most likely to commit fraud.

Evaluate Who Will Commit Fraud

Types Of Business Fraud

Fraud can take many forms, but it can be divided into three types: asset misappropriation, corruption, and financial statement fraud. Despite being the least expensive, asset misappropriation accounted for 90% of all fraud cases investigated. These are schemes in which an employee steals or exploits the resources of the organization. Stealing cash before or after it has been recorded, making false expense reimbursement claims, and/or taking non-cash assets from the organization are all examples of asset misappropriation.

  • Financial statement fraud accounted for less than 5% of cases but resulted in the highest median loss. These are schemes in which information in the company’s financial reports is omitted or intentionally misstated. This can take the form of inflated assets, hidden liabilities, or fictitious revenues.
  • Corruption was in the middle, accounting for less than one-third of all cases. Corruption schemes occur when employees use their influence in business transactions to their advantage while violating their obligations to the employer. Bribery, extortion, and conflict of interest are all examples of corruption.

Know Your Employees

Fraud perpetrators frequently exhibit behavioral characteristics that indicate their intent to commit fraud. Employee observation and listening can assist you in identifying potential fraud risk. Management must be involved with their employees and take the time to get to know them. Often, a shift in attitude can alert you to a potential risk.

This can also highlight internal issues that must be addressed. For example, if an employee feels unappreciated by the business owner or is angry at their boss, he or she may commit fraud as a form of retaliation. Any shift in attitude should make you pay close attention to that employee.

Final Thoughts

The importance of prevention and detection in reducing this loss cannot be overstated. Every organization should have a plan in place because preventing fraud is much easier than recovering losses after the fact. Forensic accounting services can help to avoid such situations and uncover financial fraud. It can assist you in determining where stolen money has gone and how to recover it.

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