“Insurance Fraud, from the
Perspective of Asset
Protection”
Presenter: Winston Delahaye; CFE, M.Sc.
1
Fraud is a common risk that should
not be ignored. The incidence of
fraud is now so common that its
occurrence is no longer remarkable,
only its scale.
Any entity that fails to protect itself
appropriately from fraud should
expect to become a victim of fraud,
or rather, should expect to discover
that it is a victim of fraud.
2
What is Fraud?
• It is any illegal acts characterized by deceit,
•
•
concealment or violation of trust.
These acts are not dependent upon the
application of threat of violence or of physical
force.
Frauds are perpetuated by individuals and
organizations to obtain money, property or
services; to avoid payment or loss of services; or
to secure personal or business advantage.
3
Historical Perspective
The oldest available recorded instances of fraud occur
in the Bible:
1. Genesis 3:13
‘Inter alia’…….and the woman said, ‘the serpent tricked
me, and I did eat.’
2. Genesis 27:11-12
11 - And Jacob said to ……his mother, ‘Behold, Esau my
brother is a hairy man, and I am a smooth man
12 - My father peradventure will feel me, and I shall
seem to him as a deceiver……..’.
4
The Impact of Fraud on Insurance
Globally
According to a recent Federal Bureau of Investigations
report on financial crimes, approximately US$1 trillion
dollars is collected in insurance premiums annually.
The report also stated that health care expenditures
represented approximately 16.5% of Gross Domestic
Product of the US economy and that by 2012 the total
health care spending will exceed US$ 3.3 trillion.
5
The Impact of Fraud on Insurance
Globally
INSURANCE FRAUD STATISTICS:
• Billions of dollars are lost every year in insurance fraud.
• Some countries including the US have compiled some statistics in their
attempt to combat this expensive economic crime.
• For example, the INSURANCE INFORMATION INSTITUTE FACT BOOK
2004, claims that insurance fraud cost insurers and corporate buyers of
insurance more than US $80 billion.
• The COALITION AGAINST INSURANCE FRAUD (CAIF) contends that
although it is hard to determine how big insurance fraud has gotten
because so much goes undetected, and a complete research has yet to be
done, they do know that :
6
The Impact of Fraud on Insurance
Globally
INSURANCE FRAUD STATISTICS:
• Health care fraud costs Americans $54 billion a year.
• According to a study by the RAND INSTITUTE FOR CIVIL JUSTICE, more
than a third of people hurt in auto accidents exaggerate their injuries to the
tune of an extra $13 – $15 billion in insurance costs.
• The JOURNAL OF THE AMERICAS MEDICAL ASSOCIATION states that,
Nearly a 3rd of doctors inflate the severity of a patient’s illness to help them
avoid early hospital discharge.
• The CAIF states that fraud schemes result in;
-
the loss of a person’s savings,
endangering their health,
constant increase in premiums and consumer goods,
loss of jobs and,
in some Instances, loss of life or quality of life.
7
The Impact of Fraud on Insurance
Regionally
8
The Impact of Fraud on Insurance
Regionally
9
The Impact of Fraud on Insurance
Regionally
10
The Impact of Fraud on Insurance
Regionally
• St. John’s, Antigua, April 2002 - three investigating judges have been
charged with figuring out where $230 million or more in state health
insurance money has gone.
• Kingston, Jamaica, July 2005 - MARK Thwaites, the former chief
operating officer of the bankrupt Dyoll Insurance Company, faced the
…..Court …on charges of insurance fraud.
• Kingston, Jamaica, Sept. 2006 - Insurance fraud exposes firms and
motorists: The insurance industry is losing millions of dollars in premiums
due to a mushrooming cover note racket, major players in the market have
revealed. While unable to place an exact dollar figure on the losses,
stakeholders said that it has long passed 6 figures.
• Guyana, Feb. 2007 - Guyanese police are questioning five employees of
Clico Life Insurance in Guyana and seeking two others in connection with a
$16 million fraud detected at the company.
11
The Impact of Fraud on Insurance
Regionally
• Trinidad & Tobago, May 2008 - Chairman of the Inter-Insurance Fraud
Committee of the Association of Trinidad and Tobago Insurance Companies
(Attic) Philip De Silva, said yesterday that incidents of fraud could hurt
T&T’s chances of becoming the international financial centre of the region.
• Trinidad, January 2007 - The Goodwill Scandal: No 'goodwill‘ at
Goodwill - Goodwill General Insurance Company Ltd and its brokers and
agents continued to issue new motor insurance policies in violation of a
March 7, 2006 directive from the Central Bank to not write new business or
renew policies.
• Barbados, October 2005 - While not admitting that it did anything
wrong, Doctors Benefit Insurance Company Limited (DBIC) of Barbados has
agreed to pay the United States Internal Revenue Service (IRS) US$2.3
million (BDS$4.6 million) for selling supplemental disability policies to 2,800
doctors in the United States under the guise that the premiums were fully
tax deductible.
12
Types of Insurance Fraud
• Insurance fraud may be classified as “hard” or “soft.”
• Hard fraud - is a deliberate attempt either to stage or invent an
accident, injury, theft, arson or other type of loss that would be
covered under an insurance policy.
• Soft fraud is sometimes called opportunity fraud and occurs when a
policyholder or claimant exaggerates a legitimate claim.
– For example, A car owner involved in a “fender bender” who pads the
claim to cover the policy deductible is committing soft fraud.
– Another example is exaggerating the number and value of items stolen
from a home or business.
13
Types of Insurance Fraud
• Soft fraud may also occur when people purposely
provide false information to influence the underwriting
process in their favour when applying for insurance.
– To lower insurance premiums or increase the likelihood that the
application for insurance will be accepted, people may
underreport the number of miles driven,
– misrepresent where a car is garaged,
– fail to provide an accurate medical history when applying for
health insurance or,
– falsify the number of employees and the nature of their work for
workers compensation coverage.
14
TYPES OF INSURANCE FRAUD
(CONTD.)
AGENT/BROKER FRAUD
Cash, Loan, and Dividend Checks
A company employee without the knowledge of an insured
or contract holder requests cash, loan or a dividend cheque
and either deposits the cheque into his bank account or
into a fictitious account. The employee, in order to
minimize his chances of being detected committing a
fraudulent act, might change the company policyholder’s
address of record to either his address or a fictitious
address. Once the cheque is issued, the address is then
changed back to the previous address.
15
TYPES OF INSURANCE FRAUD
(CONTD.)
Settlement Cheques
Company employees can misdirect settlement cheques such as
Matured Endowment, paid Up, etc., to the branch office, to their
homes, or to a fictitious address. The employee can easily create a
cheque defalcation by changing the address of record prior to the
settlement date then replacing the contract holder’s correct address
after the settlement cheque has been received and fraudulently issued.
This is particularly possible with Orphan policy/contract holders whose
whereabouts are unknown, agents have left, or/and they have been
assigned to a servicing agent.
16
AGENT / BROKER TYPES (CONTD)
Premium Fraud
Agent collects the premium, but doesn’t remit the cheque to the insurance
company. The insured has no coverage.
Fictitious Payees
An agent or a clerk can change the beneficiary of record to a fictitious person
and subsequently submit the necessary papers to authorize the issuance of a
cheque.
Fictitious Death Claims
An agent or employee obtains a fictitious death certificate and requests that a
death claim cheque be issued. The agent receives the cheque and cashes it.
The sales representative can also write a fictitious application and, after the
contestable period (usually two years), submit a phony death claim form and
obtain the proceeds. The agent therefore, by investing a few thousand dollars
could obtain far more from this fraudulent claim.
17
UNDERWRITNG
IRREGULARITIES
Equity funding
This is the process of using existing premium / policy values to finance new
businesses. As long as the insured is aware of what is being done by the agent
and fully understands the long range method of payment on the new payment
contract, there is no apparent underwriting irregularity.
Equity funding techniques, also known as piggybacking, usually do not produce
Quality business. Furthermore, the company increases the amount of life
Insurance on the books but receives little or no new funds while incurring
increased sales and administrative expenses associated with the issue of that
new business. Equity funding irregularities might involve improper financial
benefits to field personnel as well as annual incentive bonuses paid to
management if applicable.
18
UNDERWRITING
IRREGULARITIES (CONTD.)
Misrepresentation
This might occur if a sales representative makes a false statement with
the intent to deceive the prospective insured in order to knowingly
obtain an unlawful gain.
False Information
A company employee might submit the following false information to
obtain an unlawful gain :
• Improper medical information to obtain a better insurable rate for the
prospective policyholder, i.e. standard to preferred rate.
• Improper date of birth to obtain a cheaper premium on the new policy.
• Improper home address to obtain a cheaper premium for home or
automobile insurance.
19
UNDERWRITING
IRREGULARITIES
(CONTD.)
Fictitious Policies
A salesman, in order to keep his position, or improve his writing record,
submits fictitious policies. Prior to leaving a company, an individual writes
fictitious policies called TOMBSTONE CASES to improve his commission pool
so that his compensation will be greater. TOMBSTONE means an agent
literally takes names from tombstones in a cemetery and writes new policies.
Some Jamaican companies call them LIGHTPOSTS.
Sliding
The term used for including additional coverages in the insurance policy
without the knowledge of the insured. The extra charges are hidden in the
Total premium and since the insured is unaware of the coverage, few claims
are ever filed. For example, accidental death and travel accident coverages can
usually be slipped into the policy without the knowledge of the insured.
20
UNDERWRITING
IRREGULARITIES
(CONTD.)
TWISTING
This is the replacement, usually by high pressure sales techniques, of
existing policies for new ones. The primary reason, of course, is for the
agent to profit since first year sales commissions are much higher than
commissions for existing policies.
Churning
This occurs when agents falsely tell customers that they can buy
additional insurance for nothing by using built-up value in their current
policies. In reality, the cost of the new policies frequently exceeds the
value of the old ones.
21
VEHICLE INSURANCE SCHEMES
Ditching
Also known as owner give-ups, is getting rid of a vehicle to cash in on an
insurance policy or to settle an outstanding loan. The vehicle is normally
expensive and purchased with a small down payment. The vehicle is reported
stolen, stripped for parts or taken to a pound and destroyed. The scheme
sometimes involves homeowner’s insurance for the property that was “stolen”
in the vehicle.
Past Posting
This is a scheme in which a person becomes involved in an automobile
accident, but doesn’t have insurance. The person gets insurance, waits a little
bit of time, and then reports the vehicle as being in an accident, thus collecting
for the damages.
22
VEHICLE INSURANCE SCHEMES
(CONTD.)
Vehicle Smuggling
This scheme involves the purchase of a new vehicle with maximum
financing. A counterfeit certificate of the vehicle’s title is made showing
that it is free and clear. The vehicle is insured to the maximum, with
minimum deductible theft coverage. It is then shipped to a foreign port
and reported stolen. The car is sold at its new location and insurance is
also collected for the “theft.”
Vehicle Repair
This involves the billing of new parts on a vehicle when used parts
were actually replaced in the vehicle. Sometimes this involves collusion
between the adjuster and the body repair shop.
23
VEHICLE INSURANCE SCHEMES
(CONTD.)
Phantom Vehicles
The certificate of title is a document that shows the legal ownership of a
vehicle, even though it is not absolute proof that a vehicle exists, it is the basis
for the issuance of insurance policies. Collecting on a phantom vehicle has
Been shown to be easy to do.
Staged Accidents
Two drivers purposely collide where they will not be observed. Additional
damage may be added to the vehicles after impact. The cars are then driven to
a road or highway and arranged so that the accident appears to have occurred
there. The police are then notified.
24
VEHICLE INSURANCE SCHEMES
(CONTD.)
Two Vehicle Accident
Perpetrators cause an accident and then lead the innocent driver to believe
that it was their fault.
Swoop & Squat
The victim is passed by two cars while driving. The car in the lead will cut in front of
the second, forcing it to stop abruptly. The victim rear-ends the second car while the
other driver speeds away. Victims usually accept responsibility for the accident,
thinking it is their fault for not paying attention. The rear-ended vehicle usually
contains the maximum amount of passengers possible, all with injuries.
Vehicle Identification Number (VIN) – Switch
These are the works of professionals who switch VIN numbers from vehicles w
wrecked, sold and reported as being repaired, to a stolen vehicle of the same make
and model.
25
“RED FLAGS” OF INSURANCE FRAUD
• Claim made immediately after policy inception or increase in coverage.
• Insured has history of many claims and losses.
• At inception, insured asked hypothetical questions about coverage in the
event of a loss, similar to the actual claim.
• Claim is not well documented, the insured is pushy, insistent on fast
settlement, and is unusually well informed about insurance coverage and
claims procedures.
• Burglary loss claim include large, bulky property which is unusual for a
burglary.
26
“RED FLAGS” OF INSURANCE
FRAUD (CONTD.)
• Personal or sentimental property normally seen among the lost property of a
fire loss claim, is conspicuously absent.
• Insured cannot remember, does not know, where claimed property was
acquired, and cannot provide adequate descriptions.
• Claim too perfect – insured already has receipts, other documentation,
witnesses, and duplicate photographs.
• Fire and theft loss claims involves recently purchased, expensive property,
especially where insured cannot provide receipts, owner’s manuals, etc.
27
“RED FLAGS” OF INSURANCE
FRAUD (CONTD.)
• Amount on claim differs from value given to police.
• Insured is able to give police complete list of lost property on the day of the
burglary or shortly afterwards.
• Documentation provided by insured is irregular or questionable such as:
- numbered receipts from the same store and dated differently or nonsequentially;
- documents show signs of alteration of dates, descriptions or
amounts;
- insured apparent handwriting on receipts, invoices or appraisals;
- incorrect computation of tax;
- receipts, invoices, or shipping documents not stamped “paid,” or
“received”.
28
“RED FLAGS” OF INSURANCE
FRAUD (CONTD.)
• Physical evidence is inconsistent with the loss claimed by the insured, for
example, in burglary loss there is no evidence of breaking and entering; in
fire loss there is evidence of accelerant or remains do not match claimed
property; physical damage to insured’s car is inconsistent with having being
in a collision; etc.
• Information on life application is vague, ambiguous as to details of health,
history, dates, places of treatment, names of physicians / hospitals, or
specific diagnosis.
• Application not signed or pertinent questions not answered such as income,
other insurance carried, hazardous duties, or aviation or flying activity, etc.
• Insured has “excess” insurance at the time of insurance or earned income
does not warrant amount of insurance being applied for.
• Signature at the date of the application, differs from the signature at the
date of the claim.
29
“RED FLAGS” OF INSURANCE
FRAUD (CONTD.)
• Patient’s records missing from hospital or doctor’s office.
• Pressure for speed of handling – claimant wants to stop by the office to pick
up his cheque “as we’re leaving for vacation in the morning.”
• Series of prescription numbers from the same drugs store don’t coincide
chronologically with the dates of the prescriptions.
• Preliminary information for a business fire loss or home fire loss indicates
considerable financial difficulties and financial pressures being brought upon
the owner and the fire is suspicious in nature and / or origin.
• Burglary loss claim investigator observes that the remaining contents of the
scene are of inferior quality than the alleged stolen ones, there is no
indentation in the carpet where heavy items of furniture or equipment were
allegedly placed, no hooks or nails in walls that allegedly hung valuable
pictures, and / or entrances or exits too small to take large items through
without laboriously disassembling it.
30
Guidance to Help Prevent and
Deter Fraud - Protecting Assets
1. Creating A Culture of Honesty and High
Integrity.
2. Evaluating Anti-Fraud Processes and
Controls.
3. Developing an Appropriate Oversight
Process
4. Documentation
31
CREATING A CULTURE OF
HONESTY AND HIGH ETHICS
- Setting the Tone at the Top
- Creating a Positive Workplace Environment
- Hiring and Promoting Appropriate
Employees
- Training
- Confirmation
- Discipline
32
CREATING A CULTURE OF
HONESTY AND HIGH ETHICS
Setting the Tone at the Top
1.
2.
3.
4.
Directors and officers of corporations set the “tone at
the top” for ethical behavior within any organization.
Research in moral development strongly suggests that
honesty can best be reinforced when a proper example
is set—sometimes referred to as the tone at the top.
The management of an entity cannot act one way and
expect others in the entity to behave differently.
It is always necessary for management to both behave
ethically and openly communicate its expectations for
ethical behavior because most employees are not in a
position to observe management’s actions.
33
CREATING A CULTURE OF
HONESTY AND HIGH ETHICS
Setting the Tone at the Top
5. Management must show employees through its words and
6.
actions that dishonest or unethical behavior will not be tolerated,
even if the result of the action benefits the entity.
It should be evident that all employees will be treated equally,
regardless of their position.
For example, statements by management regarding the absolute
need to meet operating and financial targets can create undue
pressures that may lead employees to commit fraud to achieve them.
Setting unachievable goals for employees can give them two
unattractive choices: fail or cheat. In contrast, a statement from
management that says,
34
CREATING A CULTURE OF
HONESTY AND HIGH ETHICS
Setting the Tone at the Top
“We are aggressive in pursuing our targets, while requiring truthful financial
reporting at all times,” clearly indicates to employees that integrity is a
requirement. This message also conveys that the entity has “zero tolerance”
for unethical behavior.
7.
The cornerstone of an effective antifraud environment is a culture with a
strong value system founded on integrity.
8. This value system often is reflected in a code of conduct.
9. The code of conduct should reflect the core values of the entity and
guide employees in making appropriate decisions during their workday.
10. The code of conduct might include such topics as ethics, confidentiality,
conflicts of interest, intellectual property, sexual harassment, and fraud.
35
CREATING A CULTURE OF
HONESTY AND HIGH ETHICS
Setting the Tone at the Top
• For a code of conduct to be effective, it should be
communicated to all personnel in an understandable
fashion.
• It also should be developed in a participatory and
positive manner that will result in both management
and employees taking ownership of its content.
• The code of conduct should be included in an
employee handbook or policy manual, or in some other
formal document or location – the intranet so it can be
referred to when needed
36
CREATING A CULTURE OF
HONESTY AND HIGH ETHICS
Creating a Positive Workplace Environment
1. Research results indicate that wrongdoing occurs less frequently when
employees have positive feelings about an entity than when they feel
abused, threatened, or ignored.
2. Without a positive workplace environment, there are more opportunities
for poor employee morale, which can affect an employee’s attitude about
committing fraud against an entity.
Factors that detract from a positive work environment and may increase the
risk of fraud include:
• Top management that does not seem to care about or reward appropriate
behavior
• Negative feedback and lack of recognition for job performance
• Perceived inequities in the organization
• Autocratic rather than participative management
37
CREATING A CULTURE OF
HONESTY AND HIGH ETHICS
Creating a Positive Workplace Environment
• Low organizational loyalty or feelings of ownership
• Unreasonable budget expectations or other financial targets
• Fear of delivering “bad news” to supervisors and/or management
• Less-than-competitive compensation
• Poor training and promotion opportunities
• Lack of clear organizational responsibilities
• Poor communication practices or methods within the organization
The human resources department often is instrumental in helping to
build a corporate culture and a positive work environment. Human
resource professionals are responsible for implementing specific
programs and initiatives, consistent with management’s strategies that
can help to mitigate many of the detractors mentioned above.
38
CREATING A CULTURE OF
HONESTY AND HIGH ETHICS
Creating a Positive Workplace Environment
Mitigating factors that help create a positive work environment and reduce the
risk of
fraud may include:
• Recognition and reward systems that are in tandem with goals and results
• Equal employment opportunities
• Team-oriented, collaborative decision-making policies
• Professionally administered compensation programs
• Professionally administered training programs and an organizational priority
of career development
Employees should be empowered to help create a positive workplace
environment and support the entity’s values and code of conduct. They should
be given the opportunity to provide input to the development and updating of
the entity’s code of conduct, to ensure that it is relevant, clear, and fair.
Involving employees in this fashion also may effectively contribute to the
oversight of the entity’s code of conduct and an environment of ethical
behaviour.
39
CREATING A CULTURE OF
HONESTY AND HIGH ETHICS
Creating a Positive Workplace Environment
• Employees should be given the means to obtain advice internally before
making decisions that appear to have significant legal or ethical
implications. They should also be encouraged and given the means to
communicate concerns, anonymously if preferred, about potential violations
of the entity’s code of conduct, without fear of retribution.
• Many organizations have implemented a process for employees to report on
a confidential basis any actual or suspected wrongdoing, or potential
violations of the code of conduct or ethics policy.
Some examples - a telephone “hotline” that is directed to or monitored by
an ethics officer, fraud officer, general counsel, internal audit director, or
another trusted individual responsible for investigating and reporting
incidents of fraud or illegal acts.
40
CREATING A CULTURE OF
HONESTY AND HIGH ETHICS
Hiring and Promoting Appropriate Employees
Each employee has a unique set of values and personal code of ethics. When faced with
sufficient pressure and a perceived opportunity, some employees will behave dishonestly
rather than face the negative consequences of honest behavior. If an entity is to be
successful in preventing fraud, it must have effective policies that minimize the chance of
hiring or promoting individuals with low levels of honesty, especially for positions of trust.
Proactive hiring and promotion procedures may include:
• Conducting background investigations on individuals being considered for employment or
•
•
•
•
for promotion to a position of trust
Thoroughly checking a candidate’s education, employment history, and personal
references
Periodic training of all employees about the entity’s values and code of conduct
Incorporating into regular performance reviews an evaluation of how each individual has
contributed to creating an appropriate workplace environment in line with the entity’s
values and code of conduct.
Continuous objective evaluation of compliance with the entity’s values and code of
conduct, with violations being addressed immediately.
41
CREATING A CULTURE OF
HONESTY AND HIGH ETHICS
Training
• New employees should be trained at the time of hiring about the entity’s values and its
code of conduct. This training should explicitly cover expectations of all employees
regarding:
• their duty to communicate certain matters;
• a list of the types of matters, including actual or suspected fraud, to be communicated
along with specific examples; and
• information on how to communicate those matters.
• There also should be an affirmation from senior management regarding employee
expectations and communication responsibilities. Such training should include an
element of “fraud awareness,” the tone of which should be positive but nonetheless
stress that fraud can be costly (and detrimental in other ways) to the entity and its
employees.
• In addition to training at the time of hiring, employees should receive refresher training
periodically thereafter. Ongoing training for certain positions, maybe considered for
purchasing agents or employees with financial reporting responsibilities. Training
should be specific to an employee’s level within the organization, geographic location,
and assigned responsibilities. For example, training for senior manager level personnel
would normally be different from that of non-supervisory employees, and training for
purchasing agents would be different from that of sales representatives.
42
CREATING A CULTURE OF
HONESTY AND HIGH ETHICS
Confirmation
• Management needs to clearly articulate that all employees will be held accountable to
act within the entity’s code of conduct. All employees within senior management and
the finance function, as well as other employees in areas that might be exposed to
unethical behavior (for example, procurement, sales and marketing) should be required
to sign a code of conduct statement annually, at a minimum.
• Requiring periodic confirmation by employees of their responsibilities will not only
reinforce the policy but may also deter individuals from committing fraud and other
violations and might identify problems before they become significant.
• Such confirmation may include statements that the individual understands the entity's
expectations, has complied with the code of conduct, and is not aware of any violations
of the code of conduct other than those the individual lists in his or her response.
• Although people with low integrity may not hesitate to sign a false confirmation, most
people will want to avoid making a false statement in writing. Honest individuals are
more likely to return their confirmations and to disclose what they know (including any
conflicts of interest or other personal exceptions to the code of conduct). Thorough
follow-up by internal auditors or others regarding non-replies may uncover significant
issues.
43
CREATING A CULTURE OF
HONESTY AND HIGH ETHICS
Discipline
The way an entity reacts to incidents of alleged or suspected fraud will send a
strong deterrent message throughout the entity, helping to reduce the number
of future occurrences. The following actions should be taken in response to an
alleged incident of fraud:
•
•
•
•
A thorough investigation of the incident should be conducted.
Appropriate and consistent actions should be taken against violators.
Relevant controls should be assessed and improved.
Communication and training should occur to reinforce the entity’s values, code
of conduct, and expectations.
Expectations about the consequences of committing fraud must be clearly
Communicated throughout the entity.
44
CREATING A CULTURE OF
HONESTY AND HIGH ETHICS
Discipline
For example, a strong statement from management that dishonest
actions will not be tolerated, and that violators may be terminated and
referred to the appropriate authorities, clearly establishes
consequences and can be a valuable deterrent to wrongdoing. If
wrongdoing occurs and an employee is disciplined, it can be helpful to
communicate that fact, on a no-name basis, in an employee newsletter
or other regular communication to employees. Seeing that other people
have been disciplined for wrongdoing can be an effective deterrent,
increasing the perceived likelihood of violators being caught and
punished. It also can demonstrate that the entity is committed to an
environment of high ethical standards and integrity.
45
EVALUATING ANTIFRAUD
PROCESSES AND CONTROLS
- Identifying and Measuring Fraud Risks
- Mitigating Fraud Risks
- Implementing and Monitoring Appropriate Internal
Controls
46
EVALUATING ANTIFRAUD
PROCESSES AND CONTROLS
Misappropriation of assets cannot occur without a
perceived opportunity to commit and conceal the
act. Organizations should be proactive in reducing
fraud opportunities by;
• (1) Identifying and measuring fraud risks,
• (2) Taking steps to mitigate identified risks, and
• (3) Implementing and monitoring appropriate preventive and
detective internal controls and other deterrent measures.
47
EVALUATING ANTIFRAUD
PROCESSES AND CONTROLS
Identifying and Measuring Fraud Risks
–
–
–
–
–
Management has primary responsibility for establishing and monitoring
all aspects of the entity’s fraud risk-assessment and prevention
activities.
Fraud risks often are considered as part of an enterprise-wide risk
management program, though they may be addressed separately.
The fraud risk-assessment process should consider the vulnerability of
the entity to fraudulent activity and whether any of those exposures
could result in a material loss to the organization.
In identifying fraud risks, consideration should be given to industry, and
country-specific characteristics that influence the risk of fraud.
The nature and extent of management’s risk assessment activities
should be commensurate with the size of the entity and complexity of
its operations.
For example, the risk assessment process is likely to be less formal and less
structured in smaller entities.
48
EVALUATING ANTIFRAUD
PROCESSES AND CONTROLS
Identifying and Measuring Fraud Risks
However, management should recognize that fraud can
occur in organizations of any size or type, and that
almost any employee may be capable of committing
fraud given the right set of circumstances.
Accordingly, management should develop a heightened
“fraud awareness” and an appropriate fraud riskmanagement program, with oversight from the board of
directors or audit committee.
49
EVALUATING ANTIFRAUD
PROCESSES AND CONTROLS
Mitigating Fraud Risks
•
It may be possible to reduce or eliminate certain fraud risks by
making changes to the entity’s activities and processes.
•
An entity may choose to sell certain segments of its operations,
cease doing business in certain locations, or reorganize its
business processes to eliminate unacceptable risks.
•
For example, the risk of misappropriation of funds may be
reduced by implementing a central lockbox at a bank to receive
payments instead of receiving money at the entity’s various
locations. The risk of corruption may be reduced by closely
monitoring the entity’s procurement process.
50
EVALUATING ANTIFRAUD
PROCESSES AND CONTROLS
Implementing and Monitoring Appropriate Internal Controls
•
Some risks are inherent in the environment of the entity, but most can be
addressed with an appropriate system of internal control.
•
Once fraud risk assessment has taken place, the entity can identify the processes,
controls, and other procedures that are needed to mitigate the identified risks.
•
Effective internal control will include a well-developed control environment, an
effective and secure information system, and appropriate control and monitoring
activities.
•
Because of the importance of information technology in supporting operations and
the processing of transactions, management also needs to implement and maintain
appropriate controls, whether automated or manual, over computer-generated
information.
•
In particular, management should evaluate whether appropriate internal controls
have been implemented in any areas management has identified as posing a higher
risk of fraudulent activity.
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DEVELOPING AN
APPROPRIATE OVERSIGHT
PROCESS
- Audit Committee or Board of Directors
-
Management
Internal Auditors
Independent Auditors
Certified Fraud Examiners
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DEVELOPING AN
APPROPRIATE OVERSIGHT
PROCESS
To effectively prevent or deter fraud, an
entity should have an appropriate
oversight function in place. Oversight can
take many forms and can be performed by
many within and outside the entity, under
the overall oversight of the audit
committee of the board of directors.
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DEVELOPING AN
APPROPRIATE OVERSIGHT
PROCESS
Audit Committee or Board of Directors
• The audit committee should evaluate management’s identification of
fraud risks, implementation of antifraud measures, and creation of
the appropriate “tone at the top.”
• Active oversight by the audit committee can help to re-inforce
management’s commitment to creating a culture with “zero
tolerance” for fraud. The audit committee typically has the ability
and authority to investigate any alleged or suspected wrongdoing
brought to its attention.
• Most audit committee charters empower the committee to
investigate any matters within the scope of its responsibilities, and
to retain legal, accounting, and other professional advisers as
needed to advise the committee and assist in its investigation.
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DEVELOPING AN
APPROPRIATE OVERSIGHT
PROCESS
Management
• Management is responsible for overseeing the
activities carried out by employees, and typically
does so by implementing and monitoring
processes and controls, as mentioned earlier.
• However, management also may initiate,
participate in, or direct the commission and
concealment of a fraudulent act. Accordingly, the
audit committee has the responsibility to
oversee the activities of senior management
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DEVELOPING AN
APPROPRIATE OVERSIGHT
PROCESS
Internal Auditors
• An effective internal audit team can be extremely helpful in performing
aspects of the oversight function. Their knowledge about the entity may
enable them to identify indicators that suggest fraud has been committed.
• Internal audits can be both a detection and a deterrence measure. Internal
auditors can assist in the deterrence of fraud by examining and evaluating
the adequacy and the effectiveness of the system of internal control,
commensurate with the extent of the potential exposure or risk in the
various segments of the organization's operations.
• Internal auditors may conduct proactive auditing to search for corruption
and misappropriation of assets.
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DEVELOPING AN
APPROPRIATE OVERSIGHT
PROCESS
Independent Auditors
• Independent auditors can assist management and the board of
directors (or audit committee) by providing an assessment of the
entity’s process for identifying, assessing, and responding to the
risks of fraud.
• The board of directors (or audit committee) should have an open
and candid dialogue with the independent auditors regarding
management’s risk assessment process and the system of internal
control.
• Such a dialogue should include a discussion of the entity’s exposure
to misappropriation of assets.
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DEVELOPING AN
APPROPRIATE OVERSIGHT
PROCESS
Certified Fraud Examiners
• Certified fraud examiners may assist the audit committee
and board of directors with aspects of the oversight
process either directly or as part of a team of internal
auditors or independent auditors.
• Certified fraud examiners can provide extensive
knowledge and experience about fraud that may not be
available within an entity.
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Documentation
- Written Fraud Policy
- Code of conduct
- Code of Ethics Statement
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Who is responsible for the
Detection of Fraud?
Management is responsible for designing and
implementing systems and procedures for the prevention
and detection of fraud and, along with the board of
directors, for ensuring a culture and environment that
promotes honesty and ethical behavior.
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Questions?
Contact Information:
Email: winston.delahaye@ghl.com.jm
Telephone:
1-876-355-2856
1-876-770-5537
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