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Fighting Increased Fraud Risks in an Uncertain Economy

Uncertainties in the world economy create a breeding ground for fraud. With rising inflation in Hong Kong and mainland China, the still-weakened US economy and ongoing European debt crisis, businesses need to be vigilant against fraud risks. Criminologist Donald Cressey first presented the fraud triangle, consisting of pressure, opportunity and rationalisation. Uncertainty creates pressures for organisations to cut costs. Middle management, which can serve as a control operator against fraud, is often a target for layoffs. The stretching of remaining resources leads to increased opportunity for fraud to occur. Finally individuals may rationalise that the financial pressures they face, which are a result of the actions of others, justify the means and needs to supplement their income.

The warning signs of fraud can often mimic the effects of poor performance in a lagging economy, making its detection all the more difficult. Fraud indicators can include:

  • decrease in working capital or cash flows,
  • decrease in liquidity,
  • a significant drop in sales or profits,
  • deterioration in quality of earnings, and
  • poor or deteriorating market share.

With so much to deal with, organisations can find themselves struggling to keep up, but organisations need a proactive approach when combating fraud. There are immediate steps organisations can take to mitigate the risks of fraud occurrence.

Step 1: Assess the environment

  • Does your organisation have a code of conduct?
  • Is there a clear top down policy that emphasises ethics, and does management ardently enforce ethics rules?
  • How is recurring misconduct prevented?
  • Is there an effective channel to report suspected fraud?

Step 2: Assess anti-fraud controls

  • Interview key employees about integrity risks and test for adherence to existing policies and procedures.
  • Perform computer-assisted audit tests to identify any suspicious activity.
  • Perform public-record searches to verify selected employee and supplier information. In China where public information is not so readily available, in-person visits may be required to verify the supplier environment and transactional controls.

Step 3: Make improvements

  • Develop procedures for an ongoing monitoring process.
  • Develop a corrective action plan.
  • Implement policy, procedural and organisational changes and communicate these changes.
  • Review summary findings with the audit committee and senior management.

Your organisation’s internal audit and legal departments can be key components of implementing a robust anti-fraud programme. They often possess the knowledge and skills sets for detecting and preventing fraud. Technology is another important element in your arsenal. Data analytics enable an organisation to accurately, effectively and promptly identify suspicious trends. In 2011, Grant Thornton released its study entitled, Looking to the future: Perspectives and trends from internal audit leaders, whereby 300 Chief Audit Executives (CAE) from U.S.-based public and private institutions were surveyed. The survey revealed that 71% of CAEs who were using data analytics reported quicker pattern, trend and relationship identification with additional benefits of 76% reporting more efficient internal audit processes and 61% reporting increased internal audit coverage.

While it can be difficult to justify spending additional money and resources on new processes, investing in stronger fraud prevention presents benefits that often outweigh their costs. Beyond averting monetary theft, a comprehensive fraud prevention programme can help organisations steer clear of government investigations and other litigation. In addition, the reputational damage that accompanies fraud allegations is difficult to overcome. With the growing emphasis on transparency and good corporate governance, organisations are being pushed to clearly demonstrate a commitment to integrity.

Content provided by Grant Thornton Hong Kong Limited
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