Step 4 in risk management

Evaluate who is likely to commit fraud. Which people and departments are most likely to commit fraud. The organization’s senior management must assess the fraud risks to which the organization is exposed. To properly assess the fraud risks inherent in business processes and departments, management must look at the organization in terms of the various departments and sub-departments that together make up the organization.

Evaluate Who Will Commit Fraud: Step 4 in Risk Management

By assessing fraud risks across departments, management can delve deeper into the operational activities of different departments, which also puts the focus on individuals performing core tasks. Such analysis highlights areas where segregation of duties is a must or processes where controls are considered weak.

Each department is headed by several employees, who are usually overseen by a single department head. For example, the Finance department is headed by the Chief Financial Officer (CFO). The CFO is assigned a finance team that ensures that financial transactions are recorded accurately and in a timely manner in the company’s financial system or financial statements.

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

The CFO should analyze the roles and responsibilities of his finance team, especially those that perform critical processes such as recording fixed assets, payment authorizations, etc. These processes that involve funds or authorizations of funds typically carry greater fraud risks than processes that do not involve the inflow or outflow of funds.

Sales department

Similarly, the Sales department is headed by the Head of Sales, who runs the Sales department with his sales team. The Head of Sales must identify the fraud risks in the Sales department to ensure that potential sales-related fraud risks are identified and mitigated in a timely manner.

A typical manufacturing organization consists of the following departments:

• Production
• Supply Chain Management, including purchasing
• Business and Sales
• Marketing
• Finances
• Operations

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

Management must identify the incentives and pressures to determine which individuals and departments are most likely to commit fraud.

Types of Corporate Fraud

Fraud can take many forms, but can be divided into three types: asset misappropriation, corruption, and financial statement fraud. Although asset misappropriation is the least costly, asset misappropriation accounted for 90% of all fraud cases investigated. These are schemes where an employee steals or exploits the organization’s resources. Stealing cash before or after it has been recorded, submitting false expense reports, 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 is omitted or deliberately misrepresented in a company’s financial statements. This can take the form of inflated assets, hidden liabilities, or fictitious income.

• Corruption was somewhere in between, accounting for less than a 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 conflicts of interest are all examples of corruption.

Know your employees

Fraudsters often display behavioral traits that indicate their intent to commit fraud. Observing and listening to employees can help you identify potential fraud risks. Management should engage with their employees and take the time to get to know them. Often, a change in attitude can alert you to a potential risk.

This can also highlight internal issues that need to be addressed. For example, if an employee feels unappreciated by the business owner or is angry with his or her boss, he or she may commit fraud as a form of retaliation. Any change in attitude should cause you to 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, as preventing fraud is much easier than recovering losses after the fact. Forensic accounting services can help prevent such situations and uncover financial fraud. It can help you determine where stolen money has gone and how to recover it.