Comprehensive Plan To Prevent Fraud | Roles Of Top Management, Audit Committees, And Essay.

During the past year, your company has discovered three major frauds. The first was a $3.9 million theft of inventory that had been going on for six years.  The second was a $2.8 million kickback scheme involving the most senior purchasing agent. She had been allowing certain customers to overcharge for products in return for personal payments and other financial favors. The third was an overstatement of receivables and inventories by a subsidiary manager to enhance reported earnings. Without the overstatement, his units profit would have fallen far short of budget. The amount of overstatement has yet to be determined. All three of these frauds have been reported in the financial newspapers and have been embarrassing to the company.

In response to these incidents, the board of directors has demanded that management take "positive steps to eliminate future fraud occurrences."  In their words, they are "sick and tired of significant hits to the bottom line and negative exposure in the press." The responsibility to develop a program to eradicate fraud has fallen on your shoulders. You are to prepare a comprehensive plan to prevent future frauds. In devising your strategy, explain the roles the following groups will play in preventing fraud:

• Top Management
• Middle Management
• Internal Audit
• Corporate Security
• Audit Committee
• Legal Counsel

Begin to work on Written Assignment #1, which is due at the end of Week 3.  The paper should be written in MS Word, saved and posted as an attachment in the Assignment Drop Box located in the Week 3 folder in the Lessons section. Include your name and assignment name on the document. Do not cut and paste the text of your assignment into the assignment drop box.  Formatting and referencing style applies: 1 inch margin, double spacing, 12 point font (Times new Roman), before and after settings in the paragraph tab set at 0 and 0, NOT 0 and 10, along with in-text citations and references etc. Paper must be at least 5 pages of text, EXCLUDING the reference and cover pages.  

Internal Control

Although there are several methods to ensure effective fraud prevention but the most effective method to ensure a company is prevented from being defrauded is strong internal controls. However, apart from string internal controls, the attitude of a company towards fraud and an ethical organizational culture is equally important to ensure fraud prevention (Petra?cu & Tieanu, 2014). While an ethical culture within an organization is driven by the control environment of senior management which is also known as the ‘tone at the top’, the Audit committee and Board of Directors also have significant roles to play to prevent a company from fraudulent conducts.

Internal control is widely defined as a process that is influenced by the board of directors of a company, management and personnel which strive to provide reasonable assurance with respect to the achievement of objectives in certain categories such as efficiency and effectiveness of operations, compliance with applicable regulations and laws and reliability of financial reporting of the company. Internal Controls must not be considered as ‘static’ as they are fluid and dynamic set of tools that has evolved over time because of the changes that takes place in the technology, business and fraud environment in respond to industry practices, competition, regulation, legislation and current economic conditions.

In respect to the given case study, in order to strengthen the internal control, it is important to conduct a comprehensive review of risks that the company had faced that is, the three significant financial frauds. Besides, it is also important to conduct a review of the all the internal controls that are already prevailing in the company to ensure that such internal control are adequate or competent enough to prevent the company from fraudulent conducts. The company either may conduct the review of the existing internal controls on a location basis or through corporate wide basis or it may be broken down to the individual business unit level (Wells, 2017). A review of this nature involves an in depth examination of people, technology and processes.

The three essential characteristics of fraud-resistant organizations include the following traits:

• The presence of skepticism;
• A tone at top of the company that encourages ethical culture;
• The involvement of all the participants in the supply chain of financial reporting;

The roles played by the following group of people shall enable the company to prevent fraud.

Top Management- it is imperative to establish an ethical culture and extend support and resources for strengthening the fraud risk-management programs and internal controls, as it is the main responsibility of top management. The management should play a significant role in encouraging scepticism, which is a essential element of an ethical culture (Albrecht et al., 2015)

Roles Played by Different Groups

Middle management- the Board members are required to possess sufficient knowledge about the company that they work for and exercise scepticism constructively. They must comprehend the role that pressure, opportunity and rationalization plays in reporting about any fraudulent activities that takes place with respect to the finance of the company.

Audit committees- the members of the board must ensure that the audit committees have sufficient knowledge about monitoring the risks associated with management that overrides the internal controls of the company. In respect of public companies, audit committees are responsible for establishing an anonymous and confidential reporting mechanism for dealing with complaints pertaining to internal accounting controls, auditing or accounting matters. Initially, the auditors of a company were primarily responsible for uncovering fraudulent activities taking place within the company. However, over the period, the responsibility of an auditor has changed to verification of accounts. This is because there has been an incline in the volume and size of the transactions that take place within a company, which has made it difficult for the auditors to examine all the transactions.

Internal auditors- the internal auditors of the organization should use a risk-based approach for assessing the effectiveness of fraud deterrence procedures and the internal controls on a regular basis. On the other hand, the external auditors must ensure at the time of developing an audit plan that the ethical values and integrity practiced by the management is taken into consideration (Albrecht et al., 2015). Moreover, the audit plan includes the oversight of the audit committee and the nature of board as well while developing such audit plan. 

Legal counsel- the legal counsel for the company must ensure that the company transactions are conducted in compliance with the relevant legislations. The legal compliance of the company in its transactions will enable the company to determine whether any activity or transactions being carried out on behalf of the company is legal or is in contravention of any company legislations. Apart from the establishment of an ethical culture within the organizations, it is equally important to ensure that the business operations of the country are lawful and justified (Suryanto, 2016).

Corporate Security- In the era of digitalization, while technology plays a significant role in carrying out business transactions, at the same time, it assists in commission of fraudulent activities within the organization. The use of technological applications is becoming significant sources of risk, which calls for stringent corporate security (Kulikova & Satdarova, 2016). In order to regulate the corporate security platform, it is important that internal controls are strengthened including the network and platform access controls, password protection policies etc.

Therefore, a comprehensive fraud prevention plan should include the following strategies:

• Fraud examiners- financial statement fraud deal with deliberate publishing of false information in any portion of the financial statement. In order to prevent the commission of such fraudulent activities, it is important that management of the organization implement stringent internal controls. This is because individuals generally tend to commit fraud when they find an opportunity to commit such fraudulent activities.
• Segregation of accounting factors- the management may prevent the commission of fraudulent activities by separating the accounting functions. The segregation of duties separates authorization, recordkeeping and review functions in the accounting process.
• Establishing a strong and ethical environment- the top management must demonstrate ethical behavior as the top management within the organization shall create the type of environment shall have a trickle-down impact on the employees of the company.
• Assessment of financial statements by independent party- in order to prevent the commission of frauds with respect to financial statement, it would be appropriate if an independent party is hired to assess the financial statements of the company annually. If an auditor is appointed to conduct a financial statement review, it would prevent employees presenting incorrect financial statements, intentionally.
• Fraud Risk assessments- internal controls of the organization should be fortified in order to ensure that fraud risk assessments are being carried out by the organization. fraud risk assessment is essential, especially, in this digitalization era, to examine the procedures and policies related to employees having direct connection with the customers of the organizations (Albrecht et al., 2015). An assessment of information regarding the protection controls and methods of an organization should be conducted. In case of any vulnerability is detected, appropriate and effective measures should be adopted to fortify such internal controls of the organization.

Conclusion

From the above discussion, it is understood that although there are several methods and approaches that aims at strengthening the internal controls of an organization, the internal controls of any organizations should be subjected to review, examination, and evaluation for strengthening them to prevent frauds in a company. Given the rapidly changing regulatory and business environment and the variety of fraudulent activities taking place within an organization, it is insufficient to establish internal controls and expecting them to stand the test of time without modifying them periodically and further expecting from the above-mentioned authorities to prevent fraud using such controls or measures. 

Reference List

Albrecht, W., Albrecht, C., Albrecht, C., & Zimbleman, M. (2015). Fraud examination (5th ed.). U.S.A.: Cengage Learning.

Anand, V., Dacin, M. T., & Murphy, P. R. (2015). The continued need for diversity in fraud research. Journal of Business Ethics, 131(4), 751-755.

Aris, N. A., Arif, S. M. M., Othman, R., & Zain, M. M. (2015). Fraudulent financial statement detection using statistical techniques: The case of small medium automotive enterprise. Journal of Applied Business Research, 31(4), 1469.

Donelson, D. C., Ege, M. S., & McInnis, J. M. (2016). Internal control weaknesses and financial reporting fraud. Auditing: A Journal of Practice & Theory, 36(3), 45-69.

Hobson, J. L., Mayew, W. J., Peecher, M., & Venkatachalam, M. (2015). Auditors’ Ability to Detect Financial Deception: The Role of Auditor Experience and Management Cognitive Dissonance.

Johansson, E., & Carey, P. (2016). Detecting fraud: The role of the anonymous reporting channel. Journal of business ethics, 139(2), 391-409.

Kulikova, L. I., & Satdarova, D. R. (2016). Internal control and compliance-control as effective methods of management, detection and prevention of financial statement fraud. Academy of Strategic Management Journal, 15, 92.

Petra?cu, D., & Tieanu, A. (2014). The role of internal audit in fraud prevention and detection. Procedia Economics and Finance, 16, 489-497.

Suryanto, T. (2016). Dividend policy, information technology, accounting reporting to investor reaction and fraud prevention. International Journal of Economic Perspectives, 10(1), 138.

Wells, J. T. (2017). Corporate fraud handbook: Prevention and detection. John Wiley & Sons