A study on Fraud prevention and Detection Essay

The purpose of this authorship is to show how fraud is defined today, why fraud bar and sensing is planetary concern and introduce chief agencies of observing and forestalling fraud.

It can be seen that fraud can run from little employee larceny, bootless behavior, peculation of company`s assets and deceitful fiscal coverage. This sort of actions can hold strong inauspicious consequence on company`s market value, repute and it reduces company`s power to accomplish its strategic aims, etc. Recently, legion instances that found themselves in spotlight of public attending, such as Enron and WorldCom, sensitized everyone ‘s consciousness about the consequence of fraudulent and delusory coverage. Therefore, big figure of companies started to be more proactive in taking serious steps to forestall and observe its happening.

The hazard of fraud can be minimized through effectual combination of bar, disincentive and sensing steps. As it will be described in more item in the remainder of this paper, fraud can be really difficult to observe. As agencies of sensing are going more sophisticated, so make the ways of perpetrating fraud. For this really ground every company should strongly underscore fraud bar, which can decidedly cut down opportunities for fraud to take topographic point, and fraud sensing, which can make atmosphere at work that fraud will be detected and committers will be punished. Furthermore, costs for fraud bar are less expensive than the clip and money needed for fraud sensing and probe.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!

order now


Specifying fraud can be harder than it seems. It is a term that can be heard really frequently in mundane life. Though, what is meant by fraud in concern universe can be slightly different. Finding consistent significance and precise definition of fraud is important for understanding it. For this ground a few legal definitions of what is considered by fraud will be presented.

In UK fraud is defined in Fraud Act signifier 2006. In explanatory notes to Fraud Act 2006, Chapter 35 it can be seen that there are several ways fraud can be committed, such as:

by false representation ( individual must do dishonest and false representation with clear purpose to derive or do loss to other party ) ,

by neglecting to unwrap information ( neglecting to unwrap an of import information to another individual to which you have legal responsibility to unwrap it, is considered as fraud ) ,

by maltreatment of place ( mistreating privileged place, where by virtuousness of this place a individual is expected to protect another`s fiscal involvement and do non move against those intersperses ) ,

by deriving or losing belongings venally ( whether stuff or rational ) , ownership of points for usage in fraud, doing or providing articles for usage in fraud ( for illustration fabrication machines for false money devising ) ,

by take parting in deceitful concern carried out on by exclusive bargainer ( deceitful trading for under the companies statute law ) ,

by taking portion in deceitful concern carried on by a company, obtaining service venally ( for illustration by avoiding payment )

and liability of company officers for offenses by company ( if a individual has specific corporate function for which is responsible, it normally applies to managers, directors, etc ) .

In USA there are legion province and federal Torahs which are modulating fraud in figure of countries, such as consumer fraud, insurance fraud, corporate fraud, etc. Summary of what is by and large perceived as fraud leads one to reason that there are some similarities with fraud definition in UK by Fraud Act 2006. In both instances there must be purposive misunderstanding of facts made by one, to the full cognizant party in order to do hurt or harm ( stuff, rational, etc. ) to other party. Fraud of neglecting to unwrap information in U.S. is interpreted as skip or `purposive failure to province stuff facts, which nondisclosure makes other statement misleading` ( www.uslegal.com )

Furthermore, in Canada fraud is classified as condemnable offense. In Canada`s Criminal Code, Article 380 ( 1 ) and 380 ( 2 ) it is stated clearly that fraud is considered to be any deceitful behavior designed to pull strings other party, so as this party will give something of value to him/her by agencies of


purposively misdirecting the 2nd party although to the full cognizant of falsity of that act

concealing a fact from the other portion which may hold prevented the party to endure any sort of loss or harm. Additionally, `every one who, by fraudulence, falsity or other deceitful agencies, whether or non it is a false pretension within the significance of this Act, defrauds the populace or any individual, whether ascertained or non, of any belongings, money or valuable security or any service… ( or ) … with purpose to victimize, affects the public market monetary value of stocks, portions, ware or anything that is offered for sale to the public` Canada`s Criminal Code, Article 380 ( 1 ) .

Contemporary research workers ( Weirich and Reinstein, 2000 ; Albrecht et al. , 1994, 1995 ) define fraud as knowing misrepresentation, stealing and rip offing investors, creditors, public, authorities organic structures, etc. Statement on Auditing Standards ( SAS ) No. 82 identifies two separate fraud types:

Deceitful fiscal coverage or direction fraud ( directors try to describe hyperbolic net income, overstates assets and grosss or understate disbursals and liabilities with purpose to modify fiscal statements ) and

Embezzlement of assets or employee fraud ( employees steal money or other companies properties ) .

This statement besides points out different fraud strategies such as employee peculation, direction fraud, investing cozenages, seller fraud, client fraud, and assorted fraud.

However, it can be concluded that though these states have similar definitions of what deceitful activities are considered to be, there are significant differences. Businesss runing in different states, particularly transnational companies, must be cognizant of these differences, Acts of the Apostless and statements as they are the one in greatest danger enduring from non exhaustively cognizing them.

Causes associated with persons perpetrating fraud – Fraud Triangle

Before explicating chief methods and organic structures within company responsible for bar and sensing of fraud, psychological factors that might act upon the behavior of fraud committers must be mentioned.

It is suggested ( Moyes and Hasan, 1996 ; Hernan, 2008 ) that the best manner of fraud bar is understanding what chief drivers of fraud are. The three following drivers are most normally known as fraud trigon.

Need – there are legion types of fiscal force per unit area, chancing wonts or possibly unreasonably high outlooks of high returns that create adequate force per unit area for direction to perpetrate fiscal statement fraud. Some warning marks of force per unit area in organisation and among employees could be discovered by internal control questionnaires, interview with directors, studies or communicating with employees.

Opportunity – people frequently see chance to perpetrate fraud when internal control system in organisation is weak. Internal hearers and directors should from clip to clip prove the effectivity of assorted types of control in order to cut down chances for fraud.

Justification – the 3rd constituent of fraud trigon is rationalisation for deceitful activity. There are a batch of different accounts and justifications of deceitful activity. Some fraudsters concludes that they did non acquire a merited publicity and want to do things right on their ain. Others did non acquire ‘deserved ‘ fillips at the yearend or they rationalize their act as ‘just adoption from the company ‘ . The hazard is higher in companies with hapless direction construction and ill-defined fillip system. Hernan ( 2008 ) suggests rating of direction competencies, objectiveness and transparence in order to place and descry on clip fraud hazards.

If direction, internal control or any other entity in a company, which responsibility is fraud bar and sensing, is cognizant of these factors, so that entity will surely be more effectual in developing mechanisms of fraud sensing and penalty

The Cost of Fraud

Before any bar and sensing method or entity within a company is discussed the cost of fraud must be explained as merely so when we realise how large harm fraud can do, we are able to truly understand significance of internal controls, audit commission, direction, internal hearers, independent hearers and certified fraud testers.

Fraud is a planetary job impacting organisations of all types and sizes. Harmonizing to the Association of Certified fraud testers ( ACFE ) estimates that US companies loose about 5 % of their one-year grosss to fraud. Majority of frauds are detected by tips or accidently. The most often type of fraud are:

plus embezzlement ( 91,5 % of reported frauds ) ,

corruptness histories for 30,8 % and

fiscal statements fraud histories for 10,6 % , with average loss estimated at 2 million dollars.

Most recent big deceitful strategies were Enron ( 63 billion dollars in assets ) and WorldCom ( 107 billion dollars in assets ) were investors lose one million millions of dollars.

Harmonizing to Adams et Al. ( 2006 ) , the greatest fiscal impact of fraud is in little houses and concerns. The loss of 7 % of grosss ( estimated by ACFE ) is besides important for big companies but little companies will likely be out of concern because of it. On the other manus, when fraud occurs companies could endure from harm of trade name and repute. Stakeholders could see that as an early warning mark. Big measures caused by fraud are about ne’er paid by committers, but unluckily, by guiltless parties such as consumers, insurance companies etc. This merely amplifies opening statement how of import occupation of organic structures in charge of fraud sensing and bar is.

Fraud bar and sensing

Many writers ( Mclnnes and Stevenson 1997, Adams et al 2006, Hernan 2008, Grambling et al 2009 ) suggests that bar of fraud is the most cost-efficient manner to cover with possible fiscal and repute loss.

For all of the grounds mentioned in old subdivisions of this work it is important for every company to develop mechanism for effectual sensing and bar of fraud.

Statement on Auditing Standards No. 99 by AICPA ( 2002 ) suggest that there should be a organic structure within a company with appropriate overight map. Oversight map can take many signifiers such as audit commission, board of managers etc. Measures this entities can implement are divided into three classs:

create ambiance of honestness and high moralss ;

measure the hazards of fraud and implement adequate procedures, processs, and controls necessary to cut down the hazards and the chances for fraud

develop an appropriate inadvertence procedure

The polar function in the procedure has the companies CEO. Although the direction is responsible for implementing these activities, without CEO ‘s support, this procedure is likely to be successful. In the inadvertence procedure specific company ‘s entity has specific function in forestalling and observing fraud. The most of import entities will now be discussed and their function will be explained.

Culture of honestness and high moralss

Every organisation should posses a set of nucleus values and nurture civilization of honestness and high moralss. This set of values is frequently involved in company ‘s codification of behavior which has purpose to steer employees in mundane activities ( frequently include subjects like moralss, confidentiality, struggles of involvements etc. ) .

Management must demo to employees through their actions that dishonest or unethical behavior will non be tolerated. It is besides of import for direction to make:

a positive workplace environment. For illustration, if employees work in bad work environment, the opportunities of perpetrating fraud against a company are greater

To engage and advance appropriate employees

Supply preparation to new employees and present them with codification of behavior

Require from employees to yearly subscribe codification of behavior and to compose about possible breakage of codification of behavior

If fraud occurs in organisation, the appropriate stairss should be taken to analyze all facets of fraud and to better bing internal controls

Implement and Monitor Appropriate Internal Controls

As mentioned before in work, people frequently see chance to perpetrate fraud when internal control system in organisation is weak. That is the chief ground why organisation should be put more attempt to minimise fraud chances.

Harmonizing to AICPA ( 2002 ) some hazards are built-in within the environment of the company, but big figure of them can be most can be discovered with a proper internal control system. One procedure for appraisal of fraud hazard takes topographic point ; the company can acknowledge controls, procedures and other processs that are important for cut downing identified hazards.

Committee of Sponsoring Organizations ( COSO ) study of the Treadway Commission states that effectual internal control should include:

a well-developed control environment

an effectual and unafraid information system,

appropriate control and monitoring activities.

Information engineering plays polar function in operations and minutess over information generated by computing machines. For this ground direction demand to implement and prolong proper controls ( automated or manual ) . Particularly, direction is obliged to measure whether internal controls have been implemented in those countries where high hazard of fraud exists and in entities where fiscal studies are processed. Coverage of deceitful activities can be traveling on impermanent footing, therefore direction should measure internal controls responsible for short term fiscal coverage.

The institute for fraud bar in 2007 mentioned that upper degree direction is normally involved in deceitful fiscal coverage by overruling internal controls involved in commanding the procedure

that deceitful fiscal coverage by high-level direction typically involves override of internal controls within the fiscal coverage procedure. Because direction has the ability to overrule controls the demand for a strong value system and a civilization of ethical fiscal coverage becomes more of import. This helps make an environment in which other employees will worsen to take part in perpetrating a fraud and will utilize established communicating processs to describe any petitions to perpetrate error. The potency for direction override besides increases the demand for appropriate inadvertence steps by the board of managers or audit commission which will be discussed in the undermentioned subdivision.

Deceitful fiscal coverage by lower degrees of direction and employees may be detected by appropriate monitoring controls, such as holding higher-level directors reappraisal and measure the fiscal consequences reported by single runing units or subordinates. Unusual fluctuations in consequences or the deficiency of expected fluctuations may bespeak possible use by some section directors or employees.


After execution of codification of behavior, nucleus values and internal control procedure into organisation, direction should besides develop an appropriate inadvertence procedure to overlook internal controls and cut down every bit much as possible hazard of fraud. The inadvertence procedure contains direction, internal hearers, audit commission, independent hearers and certified fraud testers.

Audit Committee or Board of Directors

Gramling et Al. ( 2009 ) in his work argue that audit commission is critical component of internal controls and have of import stewardship duty to stockholders. Besides he cited former SEC president Arthur Levitt who described audit commission as ” one of the most dependable defenders of the public involvement ” ( Gramling et al.,2009, p.24 ) .

Harmonizing to research taken by Cohen et Al. ( 2009 ) , audit commission effectivity has been improved since Sarbanes-Oxley act of 2002. From hearers perspective, audit commission has adequate expertness to place chief hazards and oversee internal controls. It is important that audit commission members be independent of direction to supply inadvertence and comply with ordinances. This could be a job particularly in smaller companies. Besides smaller companies confronting with another problem- How to happen and enroll quality and qualified members for audit commission.

AICPA ( 2005 ) suggested to scrutinize commission to see periodical meetings with representatives from each of the above mentioned groups ( internal hearers, external hearers etc. ) to discourse any affair could impact the fiscal coverage procedure and increase the hazard of fraud.

The chief responsibilities of audit commission should be to: measure direction ‘s designation of fraud hazards and execution of antifraud steps. Audit commission can by active inadvertence support direction in execution of appropriate fraud bar steps. The concluding purpose is better protection of all stakeholders.

The Report of the NACD Blue Ribbon Commission on the Audit Committee ( 2000 ) emphasized the importance of function which audit commission dramas in assisting the board of managers in oversight responsibilities, with respect to company ‘s fiscal coverage procedures and internal control systems.

When taking the inadvertence duty, the audit commission must take attention non to overrule directions command duties. Therefore, they should hold a good communicating with internal and external hearers and may see to reexamine from clip to clip firm`s reported information with forecasted 1s and industry norms every bit good. In add-on to this SAS 60 in AICPA ( 2002 ) argues that communicating with external hearers could better strength of the house ‘s internal control and give higher potency to cover with deceitful fiscal coverage

10 See Statement on Auditing Standards No. 60, Communication of Internal Control Related Matters Noted in an Audit ( AICPA, Professional Standards, vol. 1, AU sec. 325 ) , and SAS No. 61, Communications With Audit Committees ( AICPA, Professional Standards, vol. 1, AU sec. 380 ) , as amended.

Audit commission, as portion of their oversight responsibilities, should seek to actuate direction to promote all employees to describe everything that looks like unethical behavior, fraud, or any misdemeanors of the codification of behavior. The commission should so have periodic studies from direction and employees, depicting the nature of any possible unethical behavior.

Report of the NACD Best Practices Council ( 1998 ) suggests that if senior direction is involved in fraud ( harmonizing to Deloitte study 2008, which is the instance in 68 per cent of all fiscal statement fraud ) , following direction degree is really likely to be cognizant of it. Hence, it would be recommended that audit commission has an unfastened communicating with one or two degrees of direction under senior executives. In this manner they could take portion in fraud designation at the top places of the organisation.

Normally, the audit commission has the power to look into all leery activities that catch their attending and within the kingdom of their duties. They could besides profit from aid of accounting and professional advisers. All commission members must be educated about fundss and have at least one expert in that field.


Mclnnes and Stevenson ( 1997 ) argue that harmonizing to statements in SAS 110 direction is responsible for the bar and sensing of fraud. Besides Cadbury commission ( 1992 ) requires from managers to describe on effectivity of a company ‘s internal control system. On the other manus, Kranacher and Stern- Cpa diary argue that despite the duty for forestalling fraud lies on direction of company, hearers should be besides prepared to observe fraud. Writers underpin their statement with presentation of SAS 99-Consideration of fraud in fiscal statements, which set new fraud criterions for hearers. It requires from hearers to discourse with direction about possible frauds in organisation and to be cognizant of hazard that fraud may happen and be stuff for fiscal statements.

The chief concerns about fraud bar could be informations presented from The institute for fraud bar in 2007 that executive managers ( CEO and CFO ) could lead on hearers and audit commission by supplying false information. Their analysis further indicates that in 21 % of the fiscal statements fraud instances, external hearers were named as participants. Besides in 40 % of companies where fraud took topographic point, board members were participants. This can be important obstruction in effectual fraud sensing.

Similar groundss could be seen from Deloitte ‘s study taken in 2008 about fiscal statement fraud. CEO, CFO and accountant of the company were involved in 68 % of persons who committed fiscal statement fraud. Other members of direction were involved in 24 % of all fiscal statement fraud. That study can give us a batch of interesting informations about fiscal statement fraud. For illustration, most common fraud strategies are gross acknowledgment ( 38 % , particularly entering of fabricated gross ) , use of disbursals ( 12 % ) , improper revelations ( 12 % ) and use of liabilities and assets etc. The fiscal fraud strategies are most common in industries like telecommunications, engineering, media and amusement. The mean continuance of fraud strategies has been seven old ages in 2008 and has increasing tendency.

Duty of direction is to oversee the employees` activities. They typically do that by implementing and montiroing all control means antecedently mentioned. Management is besides able to get down, take portion in, or direct agencies against deceitful Acts of the Apostless. Audit commission is responsible ( if there is no audit commission the board of managers is in charge ) to oversee activities of senior directors and think about hazards that fraudulent fiscal coverage brings.

Mclnnes and Stevenson ( 1997 ) in their work conclude that although general public perceive external hearers as strongest defensive against corporate fraud that is non their primary aim. Board of managers have a responsibility to safeguard the assets of their companies and to describe on the effectivity of their companies internal control system ( subdivision 404 of SOX ) .

The most effectual manner of execution of step for cut downing error is to set up them on a scope of nucleus values that could be embraced by the company. These values consist of of import cardinal rules that have the possible to steer all employees` actions. Then this values could be taken a measure farther and a platform for elaborate codification of behavior could be signifiers. Company ‘s codification should imply specific descriptions about what is permitted and what is prohibited. At the terminal direction must be clear in saying that all employee`s will be hold accountable in the company`s codification of behavior.

Besides Mclnnes and Stevenson ( 1997 ) argue that board of managers are responsible for bar and sensing of deceitful activities by others in the company, but on the other manus it is non clear who has a legal duty for forestalling and observing deceitful activities by managers.

Internal Hearers

Organized audit squad can very efficaciously be involved in many facets of inadvertence control. Their acquaintance with how entity operates can assist them place indexs of fraud. The Standards for the Professional Practice of Internal Auditing ( IIA Standards ) , issued by the Institute of Internal Auditors, province “ The internal hearer should hold sufficient cognition to place the indexs of fraud but is non expected to hold the expertness of a individual whose primary duty is observing and look intoing fraud. ” Internal hearers are in place to asses fraud hazards and control, and suggest actions for hazard minimisation and control betterment.

Some criterions, such as IIA Standards, even require from internal hearers to execute appraisal of possible company`s hazard. These appraisals of hazard so supply get downing point for audit programs and internal control trials are based on them. Additionally, the same criterion demands that all audit programs are presented and permitted by the audit company ( where audit commission does non be this should be presented to board of managers ) . Furthermore, audit programs provide warrant for avowal of management`s control.

Internal audit can hold two functions – sensing and disincentive. Internal hearers are included in fraud disincentive by analyzing and measuring the rightness and efficiency of internal control systems, though Hillison et Al ( 1999 ) states that it is duty of direction.

In put to deathing this duty, internal hearers should:

– measure the control environment

– identify control failings

– have strong communicating with direction

Hillison et Al ( 1999 ) argue that internal hearers should pay attending on hard currency minutess every bit good as on other non-balance sheet assets. The undermentioned stairss should be taken:

– increased usage of analytical reappraisal ( because ratio analysis and tendency analysis sometimes could demo us unusual dealingss with other histories, particularly when we have several old ages informations to analyze and compare

Cohen et Al. ( 2009 ) stated that trust on internal hearers has increased in the post-SOX period, chiefly because of subdivision 404.

Internal hearers could utilize a batch of techniques ( analythical or other processs ) to forestall and observe deceitful behavior in organisation. They could seek for peculiar types of fraud or they could look into bad histories for frauds. Every intuition of fraud or direction involment should be straight reported to the audit commission.

Independent Auditors and bing audit attack to forestall fraud

External hearers have a important function in oversight procedure. They should supply information to direction and audit commission about possible hazards. In order to hold full benefit from external hearers, direction should hold unfastened communicating with them.

Glover and Aono ( 1995 ) in their work presented basic audit-risk theoretical account which consists of three elements: inherent hazard, control hazard and sensing hazard. They stressed that hearers should understand client ‘s internal control system because they should find how much they can trust on accounting information generated from client ‘s fiscal coverage system.

On the other manus, McKee and Norway ( 2006 ) argue that auditors go excessively predictable in their audits and that fraudsters could expect their actions. Furthermore, the populace and stakeholders expects from hearers to make better occupation at fraud bar ( that is the chief ground of being of audit outlook spread ) . Audit programs should integrate an component of capriciousness harmonizing to SAS 99 and ISA 240 in order to diminish fraud hazard.

The chief benefits of unpredictable hearers approach harmonizing to writers would be increasing opportunities of fraud find ( more effectual audit ) , disincentive of fraud will be besides increased ( because of decreased ‘opportunity ‘ to perpetrate fraud ) and audit will go more gratifying. On the other manus, this will hold impact on costs associated with unpredictable audit attack: excess planning clip, excess clip to execute necessary processs and extra preparation clip. Besides, writers suggested a undermentioned processs for ‘unpredictable ‘ audit attack: random sampling, unheralded stock list observation, altering techniques from anterior old ages, prove some little and low hazard histories etc.

Certified Fraud Examiners

Certified fraud testers as professionals could hold the of import function in oversight procedure. They have a batch of cognition and experience in fraud sensing and bar and could utilize their cognition to help the audit commission and internal hearers. As professionals from outside the company they can give more nonsubjective sentiment about internal control system. Besides, they can measure possible hazards of fraud ( particularly fraud committed by top direction ) and implement appropriate steps in order to minimise it.

fraud.5 5 Association of Certified Fraud Examiners, 2006 Report to the State on Occupational Fraud and Abuse ( Austin, TX:

ACFE, 2004 ) , p. 18

Ernst & A ; Young International Fraud Group, Fraud: the Unmanaged Hazard: An International Survey of the Effectss of Fraud on Business ( London, UK: Ernst & A ; Young, 1998 ) , p. 2.

To reason, despite direction have duty to carry on equal fraud hazard appraisal, audit commission should overlook quality of the fiscal coverage procedure. Harmonizing to Silver et Al. ( 2008 ) , audit commission should non merely use traditional fraud hazard appraisal ( like segregation of responsibilities ) , but to see and integrate proactive attack. In order to be good in their stewardship function they should better their accounting and fraud cognition, hunt for conniving fraud and obtain feedback.


Some organisations have significantly lower degrees of embezzlement of assets and are less susceptible to deceitful fiscal coverage than other organisations because these organisations take proactive stairss to forestall or discourage fraud. It is merely those organisations that earnestly consider fraud hazards and take proactive stairss to make the right sort of clime to cut down its happening that have success in forestalling fraud.

It was besides found that administrations with strong internal controls, internal

hearers and audit commissions were better equipped to cover with fraud in any signifier harmonizing to Alleyne and Howard ( 2005 )