Objectively assessing risk for fraud can be a difficult task for any company. While deeply ingrained policies and longstanding procedures may seem adequate, they may actually harbor opportunities for fraud. Virtually every company, therefore, can benefit from a risk assessment performed by a fraud expert.
What’s the risk?
Fraud experts consider a number of factors when determining where a company is vulnerable. Generally, businesses with hard assets that are easily converted to cash, including tools, vehicles or other widely disposable merchandise, are more vulnerable to fraud and theft than firms that provide services or highly technical or niche products.
Another factor that increases the chance of fraud is the business’s corporate culture. A climate of fear, domineering management, frequent overrides of internal controls and a perceived lack of response to rumors of fraud all put a company at higher risk of becoming victim.
A company’s vacation policy may also encourage fraud. If personnel in key financial positions aren’t required to take annual holidays, or if a vacationing employee’s work is allowed to pile up undisturbed until the employee returns, fraud may result. Similarly, employees who work excessive hours because they don’t delegate responsibility effectively may be a fraud risk – particularly if they are under pressure to meet budgets and market targets.
How easily someone could perpetrate fraud within existing operations is something else a fraud expert considers. If key areas are chronically understaffed, expense account claims aren’t verified, important duties aren’t segregated or transaction documentation is untimely or poorly organized, a knowledgeable employee can exploit these weaknesses.
Where’s the money?
Fraud experts also look for financial warning signs that trouble may be looming. These include:
- Overly secret dealings with certain customers or suppliers,
- Large amounts of cash on hand,
- Missing or unexplained documents,
- Mismatches between profitability and cash flow,
- Insufficient justification for cash reserves and
- Inadequate reconciliation of balance sheet accounts.
Excessive reporting requirements that leave insufficient time for data analysis, inadequate responses to questions from banks or auditors, lack of oversight to ensure that suppliers are appropriate and inadequate internal reporting and management accountability can also open doors for fraudulent activities.
Finally, fraud experts generally interview people with detailed knowledge of how a business works (such as upper management) to help identify risks that aren’t obvious, such as industry conditions, financing arrangements and commitments, technology changes and competitive threats.
What’s the solution?
Armed with as much information as possible, the fraud expert can then help decrease risk by suggesting procedural changes that will minimize the potential for misappropriation of assets. Fraud experts can also help you decide what measures will be most effective in identifying fraud if it takes place and determine what procedures will be used to deal with the perpetrator.
Fraud risk assessment is critically important for any company, but too often internal assessments miss the forest for the trees. An outside expert can take a longer view to impartially calculate the areas of highest risk and then work with you to design and prioritize measures to address them.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.