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14. HOW TO PREVENT FRAUD

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For question number 14: How to prevent fraud in an entity?
Every company should want to prevent fraud from happening against their organization, and most
companies will not readily admit that their organizations may be vulnerable to any significant fraud. The
reality is that many individuals can commit fraud against any organization with a clever understanding of
the company’s internal controls structure. Establishing strong Internal control is one of the best ways
against fraud.
There are several keys to effective fraud prevention such as the company's attitude towards fraud,
ethical organizational structure, and strong internal controls-some of the most important tools in the
corporate toolbox.
Fraud Prevention Tips:
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Having a truly independent and empowered audit committee.
*The audit committee should be knowledgeable of the company’s fraud risk exposure and
awareness of the steps management is taking to monitor and mitigate those risks. Truly
independent audit committees may also maintain healthy levels of skepticism to promote
continuous evaluations of the company’s anti-fraud programs and controls.
Conduct Detailed Fraud Risk Assessments.
*PCAOB Standard No. 5, released in 2007, encourages public companies to conduct annual risk
assessments and use the results of those assessments to identify the key controls in the
significant areas. PCAOB Standard No. 5 also made specific reference to fraud, encouraging
management to identify those key controls that are specifically designed to address the risk of
fraud. One purpose of a fraud risk assessment is to help focus management’s attention on the
significant fraud risks to be addressed.
Anti-Fraud Policy and Appropriate Trainings
*Once the anti-fraud policy is published periodic ethics trainings can be held throughout the
organization to provide its employees with a forum to discuss the importance of ethical
behavior. In addition to defining fraud, this policy can also address how the company intends to
respond to fraud and misconduct allegations.
Risks within a department and applicable controls:
Payroll
Internal Controls:
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Separation of duties -with payroll, separation of duties is a necessity both to lessen the
likelihood of potential fraud and to catch unintended errors.
Change authorization- any changes in an employee’s status (address, withholding allowance,
deductions, etc.) should not be processed until the employee submits a written, signed request
for the company to do so. A written, signed authorization by a manager should be required
before implementing the change.
Check payment controls -many employees now opt for direct deposit; however, there may be an
occasion when actual checks need to be processed. Always hand “live” checks directly to the
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employee. This may help prevent a type of fraud where a payroll staff member might be
tempted to create a check for a ghost employee and then pockets the check.
Internal payroll audits -Businesses should make a standard practice of routinely performing
periodic internal payroll audits. This may deter a dishonest employee from creating a system to
defraud their employer. It might also assist in uncovering unintentional errors that, if allowed to
continue unchecked, could result in substantial penalties from regulatory entities such as the IRS,
the Department of Labor, and state employment departments.
Example: A foreign research scientist received an extra $1,450 when he was put on the payroll 21 days
before he started work as a mechanism to pay his graduate school tuition.
Red flags:
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An employee is not on-site, or is not known to other department personnel.
Information in the personnel file does not agree with the payroll records
Hours entered are unusual.
Controls: Documentation, Reconciliation, and Review.
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Ensure proper supporting documentation before entering into the workday.
Purchasing
Internal Control:
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Separation of duties- to ensure proper separation of duties, assign related buying functions to
different people. With proper segregation, no single person has complete control over all buying
activities.
Accountability, authorization, and approval- you maintain accountability when you authorize,
review, and approve purchases based on signed agreements, contract terms, and purchase
orders.
Security of assets- once you have received your purchased goods, secure the materials in a safe
location. To ensure that your resources are accounted for, periodically count your inventory and
compare the results with amounts shown on control records.
Review and reconciliation- practice timely review of the supplier’s invoice, packing slips, and
purchase orders. Check accuracy of the information for prior payment, correct quantity ordered,
and the price charged. Monthly ledger reconciliation enables you to find improper charges and
validate appropriate financial transactions.
Example. The Assistant Director misappropriated $7,375 in the entity's resources over two years by
using Procurement and ProCard to purchase personal items.
Red Flags:
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One individual had full control of the purchasing process
Monitoring-reviewers not knowledgeable of department activities
Controls: Separation, Reconciliation, Review
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Support documents should be reviewed for reasonableness and reconciliation.
Reconciliation should be performed in a timely manner by somebody who is has knowledge
of department activities.
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Purchasing duties should be delegated to staff, with management approving and reviewing
all purchase activity.
Cash Receipts
Example. A manager was able to misappropriate at least $5,400 in 4 months by taking cash receipts
without being identified. He took money from the cash register and from locked money bags. The
money could have been taken by at least 35 different employees.
Red Flags:
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Larger than normal daily shortages from cash register till. There was no accountability by the
cashier. The safe was left on "day lock." Keys to the money bags were left on top of the safe.
Controls: Review/reconciliation, Safeguarding
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Have one cashier responsible for the cash drawer (per shift, per day).
limit access to the safe.
Limit access to money bags and keys.
Inform employees of responsibilities and accountability expectations.
Management should review reports that are over and short, and look for unusual trends.
Management should perform analytical reviews of revenue trends (i.e., compare actual to
expected, compare prior period to current period).
Refunds
Example. A student employee processed 96 invalid refunds to his Husky Card resulting in the
misappropriation of $32,494 in University funds over a period of three years.
Red Flags:
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Unrestricted access to the card machine
No monitoring of monthly budget activity
No daily reconciliation of sales and refund activity
Controls: Separation, Reconciliation, Review
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Restrict access for processing refunds to authorized personnel only
Document and reconcile all refunds and voided transactions
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Reconcile/review monthly budget activity
References:
Draz, D. (2011, March 28).Fraud Prevention: Improving Internal Contols. CSO Online.https://wwwcsoonline-com.cdn.ampproject.org/v/s/www.csoonline.com/article/2127917/fraud-prevention-fraudprevention-improving-internalcontrols.amp.html?amp_js_v=a6&amp_gsa=1&usqp=mq331AQFKAGwASA%3D#referrer=https%3A%2F
%2Fwww.google.com&aoh=16056039360695&amp_tf=From%20%251%24s&ampshare=https%3A%2F%
2Fwww.csoonline.com%2Farticle%2F678375
Galletti, L.(2017, April 24). Payrol Internal Controls Checklist. CPA Practice Advisor.
https://www.cpapracticeadvisor.com/payroll/article/12321382/payroll-internal-controls-checklist
Jolla, L. (2017, February 3). Internal Control Practices: Purchasing. Blink.
https://blink.ucsd.edu/finance/accountability/controls/practices/purchasing.html
Bell, E. (2010, March 10). Internal Control Checklist: 5 Anti-Fraud Strategies to Deter, Prevent and Detect
Fraud. Corporate Compliance Insight.https://www.corporatecomplianceinsights.com/internal-controlchecklist-deter-prevent-detect-fraud/
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