FRAUD PREVENTION

INTRODUCTION

When developing a fraud control system, it is very difficult to know what to protect and how to protect it if one does not first perform a risk assessment to see where the risks lie in the entity (except for a fraud that has alreadyoccurred!). The goal of any antifraud program is to prevent fraud, not just detect it. The old axiom of ‘‘An ounce of prevention is worth a pound of cure’’ is an understatement with regard to fraud. The passage of the Sarbanes-Oxley

(SOX) Act of 2002 puts into law tenets intended to prevent fraud. Although detecting fraud is important, it obviously would be better if fraud could be mitigated or minimized—prevented to the degree possible. Detection is inevitably tied to prevention, and the two together provide the system of antifraud controls.

PREVENTION ENVIRONMENT

A key to successful fraud prevention is to look at the entity’s culture and try to change it, if necessary. Some activities and attitudes can help in achieving this goal.

a.      Corporate Governance Structure

Prior to the passage of SOX, research had shown that weak corporate governance was associated with all of the major financial frauds. For instance, the COSO Landmark Study (1998) studied 200 of the 300 fraud cases handled by the Securities and Exchange Commission (SEC) from 1987 to 1997.1 The researchers found a distinctive pattern of weak boards for those entities investigated. Weaknesses from the report were summarized as follows:

-        Board members who were not independent

-        Board dominated by insiders

-        Board members with significant equity holdings

-        Board members with little board experience

-        Boards and audit committees that did not meet

-        Audit committee members who knew little about finances or auditing

-        No audit committee

-        Audit committee did not meet

-        Top executives involved in the frauds

From the weaknesses listed here, the basic elements of governance are clear and SOX addresses these issues by requiring more independence and expertise, as well as a number of other activities that relate to good corporate governance. For instance, audit committees are responsible for implementing an anonymous tips and complaints system and a whistleblower system

b. Tone at the Top

Regardless of the corporate governance structure, management’s style sets the tone for the organization. Although it is a worn-out phrase, sometimes ignored, often misused, the tone at the top is still a key to preventing fraud. If key managers, and the board of directors where it exists, continually talk about fraud, communicate fraud policies, and encourage everyone to be involved in preventing and detecting fraud, then the entity eventually will develop an antifraud culture.

c. Realistic Financial Goals

Another common element of the major frauds was the overoptimistic goals set for corporate performance. In financial frauds of the past, almost every goal and strategy of the entity revolved around increasing profits to an abnormal level for that industry and/or that entity. If the entity’s leaders, especially the board, can avoid setting unrealistic financial goals, there will be less pressure on the executives to cut corners to reach those financial goals.

d. Policies and Procedures

Policies define entity objectives and principles, while procedures define actions the entity takes to ensure objectives are achieved. Policies and procedures document the actions and transactions determined to be unethical, as well as how violations will be treated. Therefore, the foundation for an antifraud culture and environment for any entity serious about preventing fraud is a fraud policy and carefully crafted procedures based on policy. To have an effective antifraud culture, an entity should have policies and procedures that:

-        Define frauds

-        Describe publication and communication of policy

-        Describe implementation of controls for antifraud

-        Describe training

-        Describe proactive fraud audit measures

-        Describe testing of antifraud controls

-        Define investigation policies and procedures

-        Describe actions taken in fraud audit

-        Describe the analysis of evidence

-        Describe resolutions to frauds

-        Describe incident reporting procedures

But the creation of a written ethics or fraud policy is insufficient by itself. Effective systems include a means of communicating that policy adequately to all involved. Ethics policies can be based on values or principles. Instead of a detailed list of policies and procedures, a handful of values are selected as symbolic of the entity.

PERCEPTION OF DETECTION

Antifraud professionals agree that perception of detection is at the top of the list of fraud prevention measures. In fact, based on years of law enforcement and criminal justice experience, crime experts say the best deterrent to crime, including fraud, is the perception of detection. Because white-collar criminals who commit fraud tend to have some personal code of ethics, this technique is even more effective in preventing fraud than it is for ‘‘street’’ crimes. The fear of jail, humiliation, or loss of family ties is enough of a deterrent for many potential fraudsters to cause them to stop, think, and decide it is not worth the total cost. The best thing any entity can do to minimize fraud is to find a cost-beneficial way to increase the perception of detection. Some ways to increase the perception of detection include:

1.       Surveillance

2.      Anonymous tips

3.      Surprise audits

4.      Prosecution

5.      Enforcement of ethics and fraud policies

6.      Catch me if you can!

CLASSIC APPROACHES

A review of the classic approaches to the reduction of employee theft, fraud, and embezzlement is helpful in developing an effective fraud prevention and control program. Here are the classics:

a. Directive approach. The directive approach is confrontational and authoritative.

It says: ‘‘Don’t steal. If you do, and we catch you, you’ll be fired.’’

b. Preventive approach. In the preventive approach, potential fraudsters are screened out using various means, including background checks for criminal records and credit reports.

c. Observation approach. The observation approach relies on physical observation of assets and employees.

d. Investigative approach. Based on investigative results, the investigative approach follows up on discrepancies.

e, Insurance approach. This approach depends on adequate insurance coverage to cover losses that might occur due to a fraud.

OTHER PREVENTION MEASURES

Outside of the general (environmental, cultural, and corporate) prevention measures, specific prevention measures can be employed to minimize fraud. The key employees—those who have control or access over valuable and portable assets such as cash or checks—need to be the object of prevention measures and fraud countermeasures. An entity should consider the appropriate prevention measures that would hold these employees accountable for

handling valued assets.

a.       Background Checks

b.      Regular Audits

c.       Internal Controls

d.      Invigilation

ACCOUNTING CYCLES

1.      Generalizations

2.      Sales Cycle

3.      Purchases Cycle

4.      Payroll Cycle

Sumber: 

Singleton, Tommy W. dan Singleton Aaron J.2006.Fraud Auditing and Forensic Accounting: 3rd editon. New Jersey, USA: John Wiley & Sons, Inc.