Fraud Prevention

[2016/2017] 1st Semester Topic 3

Tunku Puteri Intan Safinaz School of Accountancy (TISSAUUM),
College of Business, Universiti Utara Malaysia
Dr. Oluwatoyin Muse Johnson Popoola, PhD, MBA, FCTI, FCA, CFA, RPA
Coordinator & Lecturer: A161 BKAB 3013 Forensic Accounting

10/24/16

Topics to Be Covered

Milestone 1
Create a
Culture of
Honesty,
Openness &
Assistance
10/24/16

Milestone 3
Create
expectation
Milestone 2
that fraud
Eliminate
will be
opportunities punished
to commit
fraud

Milestone 4
Tutorial

Fraud Preventing

Assess risk,
develop concrete
Create Culture of
response to
Honesty,
mitigate risk and
openness and
eliminate
High Ethics
opportunities for
fraud

10/24/16

Create a Culture of Honesty,

Openness, and Assistance

Tone at the Top

(Proper Modelling,
Labelling)

Hiring the Right kind

of Employees

Communicating
Expectations of
Honesty & Integrity

Creating a Positive
Work Environment

Proper Handling of Fraud

and Fraud Perpetrators
When Fraud Occurs

10/24/16

Hire honest people and provide

awareness training
Americans example: 30% dishonest;
40% situational dishonest; and 30%
honest
In hiring employees:
Verify all information in the applicants
resume and/or application
Request applicant to certify the
correctness and accuracy of
information on application
Train HR team in the hiring process to
conduct thorough and skillful
interviews.
Use industry specific or other
approaches (finger print, credit checks,
4
etc.

Create a Culture of Honesty,

Openness, and Assistance

Tone at the Top

(Proper Modelling,
Labelling)

Communicating
Expectations of
Honesty & Integrity

Creating a Positive
Work Environment

Proper Handling of Fraud

and Fraud Perpetrators
When Fraud Occurs

10/24/16

Create a positive work environment

Elements that contribute to the creation
of positive work environment are 3:
Create expectations about honesty
through having a good corporate code
of conduct and convey those
expectations throughout the company
Maintain open door or easy access
policies
Have positive personnel and operating
procedures
See: Albrecht at al. (2012, p.108-111, Fig
4.1) and
www.hormel.com/templates/corporate.
asp?catitemid=71&id=634
, accessed June 14, 2007.
5

Eliminate Opportunities for Fraud

Tone at the Top

(Proper Modelling,
Labelling)

Communicating
Expectations of
Honesty & Integrity

Eliminating
opportunities for
fraud to occur

Proper Handling of
Fraud and Fraud
Perpetrators When
Fraud Occurs

10/24/16

Eliminate opportunities for the

occurrence of fraud
Methods of eliminating fraud
opportunities are 5:
Maintain good internal controls system
Discourage collusion between
employees and customers or vendors
and clearly inform vendors and other
outside contacts of the companys
policies against fraud
Monitor employees and provide a
hotline (whistle-blowing system) for
anonymous tips
Create an expectation of punishment
Conduct proactive fraud auditing.
6

Eliminate Opportunities for Fraud

Tone at the Top

(Proper Modelling,
Labelling)

Communicating
Expectations of
Honesty & Integrity

Proper Handling of
Fraud and Fraud
Perpetrators When
Fraud Occurs

10/24/16

Eliminating
opportunities for
fraud to occur

Maintain or have a good internal

controls system
Committee of Sponsoring
Organisations (COSO) identifies 5
elements of internal control
framework:
A good control environment
A good accounting system
A good control activity
Monitoring
Good communication and information.

Eliminate Opportunities for Fraud

Tone at the Top

(Proper Modelling,
Labelling)

Communicating
Expectations of
Honesty & Integrity

Eliminating
opportunities for
fraud to occur

Maintain or have a good internal

controls system
Control environment
It is the overall tone of the
organization that management
establishes through its modelling
and labelling, organization,
communication and other activities.
See Introduction to Forensic
Accounting Part 2

Proper Handling of
Fraud and Fraud
Perpetrators When
Fraud Occurs

10/24/16

Eliminate Opportunities for Fraud

Tone at the Top

(Proper Modelling,
Labelling)

Communicating
Expectations of
Honesty & Integrity

Eliminating
opportunities for
fraud to occur

Maintain or have a good internal

controls system
A good accounting system
Is important so that information
used for decision making and
provided to stakeholders is valid,
complete and timely.
The system should also provide
information that is valued, classified,
authorized, and summarized.

Proper Handling of
Fraud and Fraud
Perpetrators When
Fraud Occurs

10/24/16

Eliminate Opportunities for Fraud

Tone at the Top

(Proper Modelling,
Labelling)

Communicating
Expectations of
Honesty & Integrity

Proper Handling of
Fraud and Fraud
Perpetrators When
Fraud Occurs

Eliminating
opportunities for
fraud to occur

Maintain or have a good internal

controls system
A good control activity
Involves policies and practices that
provide physical control of assets,
proper authorizations, segregation of
duties ( i.e. preventive controls),
independent checks and proper
documentation (detective controls).
In determining the kind of control
activities an organization should have
or implement:

10/24/16

Identify the nature of risks involved and

the type of abuses that could result from
these risk
Assess the costs and benefits.
10

Eliminate Opportunities for Fraud

Tone at the Top

(Proper Modelling,
Labelling)

Communicating
Expectations of
Honesty & Integrity

Eliminating
opportunities for
fraud to occur

Discourage collusion between

employees and customers or vendors
and clearly inform vendors and other
outside contacts of the companys
policies against fraud

71% and 29% of frauds are committed by

individuals and those involving collusion
respectively.
Collusive frauds in business occur due to:
1. the increasingly complex nature of
business
2. the increasing frequency of supplier
alliances where oral agreements replace
paper trails and closer relationships exist
between buyers and suppliers.
Precaution: Printing a right to audit clause
on the back of all purchase invoices.

Proper Handling of
Fraud and Fraud
Perpetrators When
Fraud Occurs

10/24/16

11

Eliminate Opportunities for Fraud

Tone at the Top

(Proper Modelling,
Labelling)

Monitor employees and provide a

hotline (whistle-blowing system) for
anonymous tips

Individuals who commit fraud and hoard

stolen proceeds are virtually non-existent.
Instead, use stolen money to support habits,
increase their lifestyle, or pay for expenses
already incurred.
Management should pay attention to the
lifestyle symptoms such as purchase of
automobiles, expensive clothes, new homes,
take extravagant vacations, purchase
expensive recreational toys, such as boats,
condominiums, motor homes, or airplanes,
support extramarital relationships or outside
business interests.
Whistle-blowers discourage fraud.

Communicating
Expectations of
Honesty & Integrity

Eliminating
opportunities for
fraud to occur

Proper Handling of
Fraud and Fraud
Perpetrators When
Fraud Occurs

10/24/16

12

Eliminate Opportunities for Fraud

Create an expectation of punishment

A strong prosecution policy that is widely

publicized indicates to employees that
dishonest acts will be severely or harshly
punished, that not everyone is dishonest
and that unauthorized borrowing from
the company will not be tolerated.
Like a good code of ethics, prosecution
policy helps eliminate rationalizations.

Tone at the Top

(Proper Modelling,
Labelling)

Communicating
Expectations of
Honesty & Integrity

Eliminating
opportunities for
fraud to occur

Proper Handling of
Fraud and Fraud
Perpetrators When
Fraud Occurs

10/24/16

13

Eliminate Opportunities for Fraud

Tone at the Top

(Proper Modelling,
Labelling)

Conduct proactive fraud auditing

Organizations that proactively audit for

fraud create awareness among employees
that employees actions are subject to
review at any time.
Good fraud auditing involves 4 steps:

Communicating
Expectations of
Honesty & Integrity

Eliminating
opportunities for
fraud to occur

Proper Handling of
Fraud and Fraud
Perpetrators When
Fraud Occurs

10/24/16

Identifying fraud risk exposures

Identifying the fraud symptoms of each
exposure
Building audit programs to proactively
look for symptoms and exposures
Investigating fraud symptoms identified.

SAS No. 99, Consideration of Fraud in a

Financial Statement Audit (AICPA, 2002)

14

Eliminate Opportunities for Fraud

Tone at the Top

(Proper Modelling,
Labelling)

Communicating
Expectations of
Honesty & Integrity

Proper Handling of
Fraud and Fraud
Perpetrators When
Fraud Occurs

10/24/16

Eliminating
opportunities for
fraud to occur

Conduct proactive auditing

SAS No. 99, Consideration of Fraud in a

Financial Statement Audit includes
sections dealing with brainstorming of
risks of fraud while emphasizing
increased professional skepticism,
discussions with management and others
as to whether or not they are aware of
fraud or fraud symptoms; the use of
unpredictable audit tests; and responding
to management override of controls by
requiring on every audit certain
procedures responsive to detecting
management override.

15

Preventing Fraud A Summary

5. Conduct proactive fraud

auditing

3. Implement employee assistance

programmes

1. Maintain good internal controls

system

Create a culture of
honesty, openness
and assistance

2. Create a positive work

environment

4. Create an expectation of
punishment

1. Hire honest people and provide

fraud awareness training
10/24/16

Eliminate fraud
opportunities
2. Discourage collusion between
employees and others and inform
vendors of company policies on
fraud

3. Monitor employees and

implement a hotline
16

Question & Answer

Invite questions from students

10/24/16

17

Summary
Discuss topics covered in Topic 3
Fraud Prevention
Culture of honesty, openness and high
ethics
(3
elements)
Eliminate opportunities for fraud
(5 methods)

Reiterate welcome
Wrap-up

10/24/16

18

End of Class
Should you require further clarifications,
please feel free to see me on
CONSULTATION DAY at TISSA-UUM
Room 3.58, 04289 7303; or Email:
popoola@uum.edu.my; or WhatsApps
016 435 4987.
Thank you. Terima Kasih.
Dr. Oluwatoyin Muse Johnson Popoola, PhD

10/24/16

19