Importance of Forensic Auditing and Fraud Prevention Plans

Fraud englobes a range of irregular and unlawful acts qualified by intentional deceit. Fraud could be perpetrated by people within or out of an organization, this could either be done to the benefit of the organization or to its detriment.

Fraud contrived to benefit an organization yields the intended benefit by exploiting an unfair advantage that could deceive an outsider. The perpetrators of such fraud benefit indirectly, the staff of the organization will benefit only when the organization is aided by the act. Examples of ‘positive’ fraud include:

·        Sale of fictitious or misrepresented assets;

·        Intentional, improper representation or valuation of transactions, assets, liabilities, or income;

·        Engagement in prohibited business which violate rules, regulations or contracts;

·        Any form of tax fraud e.g. tax evasion, tax avoidance.

Fraud perpetrated to the detriment of the organization aims benefits an employee, outsider, or any other firm directly or indirectly. Examples of such (‘negative’) fraud include:

·        Acceptance of bribes or kickbacks (payoffs);

·        Embezzlement as epitomized by the misappropriation of property or money, concealed through the falsification of financial records;

Forensic auditing and control deters the perpetration of fraud. The primary responsibility for establishing these controls rests with management. Forensic auditing investigates fraud by examining the adequacy and effectiveness of control, commensurate with the extent of the potential exposure/risk in the various segments of the entity’s operations. Forensic auditors follow the trail of red flags. Collaboration between the forensic auditor and the internal auditor is necessary in the determining whether the organizational environment fosters control consciousness among others.

Fraud detection consists of identifying indicators of fraud sufficient to warrant the recommendation of an investigation. The forensic auditor has the following responsibilities in fraud detection:

·        He must have the required knowledge of fraud, which will enable him identify fraud indicators;

·        He must be alert to fraud opportunities like inadequate control mechanisms;

·   He should evaluate fraud indicators and decide whether there is need for investigation;

·    He should notify the appropriate authorities within the organization if he identifies sufficient indicators of the commission of fraud worth investigating.

The forensic auditor has to table a report at the end of the fraud detection phase. This report should include his conclusion as to whether sufficient information to conduct an investigation. It should also summarize findings that serve as the basis for such a decision.

Investigation comprises performing extended procedures necessary to determine whether fraud, as suggested by the indicators has occurs. Also entails gathering adequate evidence about the details of a discovered fraud. Fraud auditors, lawyers, the internal audit team, and investigators among others participate in fraud investigations. The following are the roles played by internal auditing in fraud investigation:

·    They assess the probable level and the extent of complicity in the fraud committed within the organization;

·    They determine the knowledge, skills, and discipline needed to effectively investigate the fraud;

·   They design procedures to follow and techniques to use in identifying the perpetrators, extent and causes of the fraud;

· They coordinate activities with management personnel and other specialists throughout the course of the investigation.

At the close of the investigation, the internal auditor determines the controls needed to be implemented or strengthened to reduce future vulnerability. He also designs internal auditing tests to enable the prevention of similar fraud in the future.

There are two categories of fraudsters: the professionals and the amateurs. The professionals are those who have made crime their livelihood. Crimes committed by professional fraudsters are more difficult to prevent and/or detect. The amateurs commit fraud when they succumb to their own weaknesses. Such a perpetrator could be an outstanding employee who is given too much trust; hence too much leeway as their actions aren’t adequately supervised.

Typically, organizations do not report fraud but allow the perpetrators to resign and return the money to the organization, for fear of harming their reputation (the organization’s reputation). The perpetrator on the other hand will most likely hire an attorney who will postpone the fraud trial as long as possible to allow for restitution. During the trial, the attorney will refute victimization on the basis that the money has been restituted. A very small percentage of fraud perpetrators serve a jail term as it is difficult to convict perpetrators.

Fraud prevention techniques such as: knowing your employees, enforcing vacations, screening before hiring, investigating red flags, prosecuting perpetrators, conducting regular audits, and running a fraud hotline could help in reducing fraud incidence in organizations. The following are useful fraud detection techniques that an organization should implement:

·        Examine customer lists and investigate unusual write offs or adjustments, poke into giveaway of goods and/or services,

·   Examine vendor lists and investigate unusual relationships between buyers and sellers, be critical of documentation,

·      When interviewing, have the interviewee come to your location and make them feel at home. Also, place computer printouts around the room. Replay the story during the interview.