Fraud Examination, 3E Chapter 4: Preventing Fraud COPYRIGHT © 2009 South-Western, a part of Cengage Learning

Learning Objectives Understand how to create a culture of honesty, openness, and assistance Know how to eliminate opportunities for fraud Understand how to set up an organization to effectively minimize fraud

Organizational Culture Way to Create a Culture of Honesty, Openness, and Assistance How This Step Is Accomplished Hire honest people and provide fraud awareness training. 1. Verify all information on the applicant’s résumé and application. 2. Require all applicants to affirm the truth of the matters set forth in their application and résumé. 3. Train management to conduct thorough and skillful interviews. Create a positive work environment. 1. Create expectations about honesty by having a good corporate code of conduct and conveying those expectations throughout the organization. 2. Have open-door or easy access policies. 3. Have positive personnel and operating procedures. Provide an employee assistance program (EAP). 1. Implement an EAP that helps employees deal with personal and nonsharable pressures in their lives.

Eliminate Opportunities for Fraud Five ways to eliminate fraud opportunities: Have good internal controls Discourage collusion Monitor employees and provide a whistle-blowing system Create an expectation of punishment and Conduct proactive auditing

Internal Controls Implement Assess Risks Controls Segregation of Duties Authorizations Assess Risks Implement Controls Physical Controls Independent Checks Documentation

Whistle-blower System Effective systems have the following: Anonymity Independence Accessibility Follow-up

Proactive Fraud Auditing Good fraud auditing involves four steps: Identify fraud risk exposures Identify the fraud symptoms of each exposure Build audit programs to proactively look for symptoms and exposures Investigate fraud symptoms identified

Preventing Fraud – A Summary Create a culture of Honesty, Openness, and Assistance Eliminate Opportunities Implement Employee Assistance Programs Have good internal controls Discourage Collusion Have a Code of Ethics Provide tip hotlines Publicize company policies Create a Positive Work Environment Create an expectation of punishment Proactively audit for fraud Hire honest people and provide fraud awareness training Monitor employees

Preventing Fraud – Current Model Stage 1: Fraud Incident Stage 4: Resolution Stage 2: Investigation Stage 3: Action

Preventing Fraud – Suggested Model Tone at the Top Investigation and Follow-up Education and Training Proactive Detection Integrity Risk and Controls Reporting and Monitoring