Fraud in a layman's language is wrongdoing for a selfish motive. Companies like Worldcom, Enron, Xerox, Satyam are few among the numerous examples
The exact definition being: An act carried out with an intent to deceive another to deprive them and gain an unfair advantage. There are 4 important elements:
1. Intent
2. Deceit
3. Deprive
4. Gain an unfair advantage
There is a thin line of difference between "error" and "fraud". A lack of any of the elements above leads to an error which is by nature "unintentional".
Fraud is done due to 3 things, commonly referred to as the fraud triangle:
1. Incentive/ Pressure that prompts (Greed, Lack of Money etc.)
2. Opportunity (Loophole that can be taken advantage of)
3. Rationalization ( Justification as to why one did it)
There are various ways of classifying fraud as internal/ external/ collusive. However, according to the Association of Certified Fraud Examiners (ACFE) the primary body dealing with fraud, it usually falls into the below mentioned categories:
1. Fraudulent Financial Reporting (FFR)
2. Asset Misappropriation (AM)
3. Other Fraudulent Unethical and Illegal Activities (OFUI)
One can be either proactive or reactive about it.
Proactive
An active approach to say that policies and procedures are written as guidelines and are available at the disposal of the users in the organization.
However, there is a need to monitor and track i.e. audit from time to time whether they are being followed in actual word and spirit.
Here comes into play something called a fraud risk management procedure or forensic: simply termed as "audit with an intent to find fraud is forensic".
In a nutshell the policies and procedures are studied and discussion with process owners is carried out basis sampling of actual transactions and identifying exceptions with ratings of high/medium/low so as to determine misuse and immediate potential areas to work on
Reactive
A situation/ incident happened and was identified via an employee, internal audit, external audit etc. So now comes the cop robber game without uniform.
To identify the modus operandi and the intent behind. Also corroborating the evidence so as to identify the people involved: employees/vendors/others.
Getting the confession, taking an action on the erring person, recoveries (if any, tying up with legal, reputation risk to the organization etc.
ACFE 2016 Report to nations: Important Statistics
1. Organization loss to fraud is pegged at 5% of yearly revenue
2. AM is the highest at 83% of the total cases reported
3. Median duration of a fraud scheme was 18 months. The longer a scheme, the more damage it caused!
4. Approximately 95% perpetrators resorted to means to conceal fraud
5. Tips were the most effective way of reporting fraud, approximately 39%. Organizations who have hotlines benefited most.
Middle East and North Africa fraud costs amounted to $5,00,000. Being the highest at 57% of total revenue in the world!
39% cases in 2016 were not reported for the fear of bad publicity followed by another 35% claiming that internal discipline is sufficient.
56% cases were addressed by an in-house examiner followed by 26% by professional firms.
In light of these above facts and figures there is a need to identify and combat fraud. The role of the forensic accountant has evolved over a period of time and become important as it goes beyond that of an external/ internal auditors role of just verifying the authenticity of the said statements or risks to the business.
Would be sharing further inputs on future articles. For fraud risk awareness training for corporate and write-up please contact me on the below:
Raunaq Chawla
+971-562642495/ +91-9650668585
Happy to help with a smile!
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