Governance Issues and Fraud: Types of Fraud and Fraud Prevention

There are many various types of fraud which companies may be exposed to, a summary of the major types is presented below. In addition to identifying the type of fraud, prevention measures must be implemented. Additionally below are techniques which I would recommend for the prevention of fraud based on what I learnt in AYB115, have researched as part of this blog and fraud cases such as ING and Queensland Health.

Types of Fraud:

· Employee embezzlement or occupational fraud involves employees directly or indirectly stealing from employers.

· Management fraud involves top management providing misrepresentations, usually financial information (misappropriation of funds).

· Vendor fraud is where organisations overcharge for goods and services or non-shipment of goods even though payment is made.

· Customer fraud involves customers deceiving sellers into giving customers something they should not have, such as incorrect refunds. “The customer is not always right.”

· Kickbacks are when the employer and the vendor work together to fraud the employer, the employee usually receives a ‘kickback’ when the vendor enters the contract.

Fraud Prevention:

According to Smith (1998) fraud prevention and control strategies range from general policies to highly specific, individually tailored procedures. Below in Figure 1 is a summary of the fraud prevention outlined by Albrecht, Albrecht, Albrecht, Zimbelman (2009, p.100).

Figure 1 - Summary Fraud Prevention Techniques (Albercht, et al, 2009, p.100)

Preventative policies have been developed by the Government, industry and academics to manage fraud for organisations. For example, the Government has published the AS8001-2008 guideline which is available for businesses to prevent fraud and corruption. Grain Corp (2008) has effectively applied the policies of AS 8001-2008 in their approach to mitigate fraud in item 4.4, seen below in Figure 2.

Figure 2 - Grain Corp Fraud and Corruption Procedure (2008)

Additionally models of fraud detection have been developed such as the Analysis Led Fraud Assessment (ALFA) model (Steane and Cockerell, 2005). The ALFA approach identifies areas of high fraud risk and critical fraud risk to enable organisations to address the risk of fraud. Furthermore Steane and Cockerell (2005) have defined critical risks to be area of high fraud risk where there are poor or no risk controls in place.

Moreover I have identified specific methods which I would recommend to businesses who want to prevent fraud. The key methods are to build a good ethical culture, employment screening process, whistle blowing and employee tips, red flags and fraudster profiling and developing strong internal controls. My research showed that some of the methods outlined above have been proven way to prevent fraud. Maeda (2010, p.270) and Laufer (2011) have identified that creating an ethical corporate culture and values which are emitted by management and employees is one of the most effective ways to deter fraud in an organisation. Additionally statistics have shown that an employee tip and whistle blowing schemes is a common way internal fraud is discovered (Coenen, 2009, p.199). Furthermore internal controls are another effective way to mitigate fraud. Coenen (2009, p.199) have shown that the most basic internal control, segregation of duties, is one of the most basic fraud prevention controls that all companies should implement. Segregation of duties allows for separation of responsibilities and reduces the chances of fraud as collusion between two or more people is less likely. Finally two key ways to identify fraud occurring, as outlined during the lecture, include red flags and fraud profiling. A summary of both is outlined below.

Several types of red flags were outlined in the lecture. Below in Figure 3 is a summary of these:

Figure 3 - Types of Red Flags (AYB115, Lecture 11)

Fraud profiling was outlined in the lecture and below is my summary:

· Model employees and good timekeeper who stay late working long hours. Such behaviour would indicate that the employee wants to cover up their fraud while no one is working alongside them.

· Doesn’t take holidays would indicate that the employee is hiding something that someone else might discover by taking over their role while on holiday.

· Change in behaviour such as insomnia, increased drinking, unable to relax, inability to look people in the eyes, sweating and increased smoking may indicate the person is up to something.

· Cognitive dissonance – “the feeling of discomfort that results from holding two conflicting beliefs.”

Lastly education and awareness of fraud must be used in conjunction with the above methods outlined. According to Maeda (2010, p.273) antifraud education should become an integral part of the organisation with regular review to keep employees informed and deter fraud.

Governance Issues and Fraud

Types of Fraud and Fraud Prevention

No comments:

Post a Comment