How to prevent frauds?

Fraud Risk Management (FRM) strategies for any organisation change as the company evolves. Current economic conditions have created enough opportunities for organisations to grow rapidly. This rapid growth, if not managed effectively, leaves organisations open to fraud.

FRM has come up as a daunting challenge to the entire corporate world. Organisations are constantly faced with the prospects of unscrupulous employees and business partners undermining the reputation of the business developed over years of hard work and entrepreneurship.

A business today operates in a very dynamic and ever evolving environment, whereas, the fraud prevention mechanisms (controls, systems and processes) are static – they do not evolve or change with the business environment. FRM programmes cannot afford to be reactive. These programmes must be led by a proactive advocate of a control environment that prevents and detects rather than one that responds.

The loss in business reputation caused by a fraud can often be more severe than the financial loss.

An effective FRM programme

With the strong business case for adopting a proactive approach to mitigating fraud risks – the first step is to design an effective FRM programme. Creating an FRM programme is about:

• creating a culture that fosters ethical behaviour; and

• the support that senior management provides to this programme – this has to be a top down approach

The key to such a programme is to have an aware and committed top management. It is imperative that each organisation sets the tone at the top; people driving the FRM programme should have the ability and standing within the organisation, to be able to seek and achieve results.

An FRM programme should encompass the following:

• defined roles and responsibilities: assign appropriate oversight of FRM;

• ethics codes;

• hotline;

• education and training – ethical dilemmas; giving practical examples on core values;

• programme should be audited regularly to ensure its viability and desired results; and

• anti-fraud programme designed keeping in mind the industry and specific to the company’s needs.

Questions to be answered: Where are you doing business? Who are you doing business with? How are you doing business?

Implementation

The key to successful implementation and ensuring compliance of the FRM programme includes the following:

• constant re-enforcement

• random auditing

• responding to incidents and gaps in controls; subsequently altering controls to mitigate risks

Conclusion

To sum up, the current business environment is in a state of constant flux. FRM, in such a scenario, has to be one step ahead of evolving business practices and their rapid pace of growth in order to secure businesses from fraud risks.

A proactive and controlled FRM programme holds the key to protecting an organisation from financial risk and loss of reputation. Starting with identifying potential fraud risk, to analysing and designing an effective control system, and finally, implementation, a strategically planned FRM programme is a cyclical process that is constantly active and adaptive to change.

Risk owners are vital to a successful FRM programme. Identifying and assigning risk owners and the constant re-enforcement of their ranks ensure that the fraud prevention mechanism functions effectively. Regular programme audits would help keep FRM on track and ensure its implementation in a controlled environment.

Anil Roy
Partner - Forensic & Investigation Services
Grant Thornton India LLP