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Best Practices For The Prevention And Detection Of Fraud

1679 words - 7 pages

There is usually shock and disbelief when fraud is discovered in a corporation. Fraud is a very general term that refers to the deliberate deception to secure an unfair or unlawful gain. Fraud involves a theft that the perpetrator often tries to conceal (Farrell and Franco 1999). The perpetrator then attempts to transfer the stolen assets or resources into personal assets or resources (Farrell and Franco 1999). In general, financial fraud is made up of four broad categories consisting of fraudulent financial reporting, misappropriation of assets, expenditures and liabilities for inappropriate intentions, and fraudulently obtained revenues and assets that include avoided costs and expenses (PricewaterhouseCoopers 2008). A company that attempts to prevent fraud avoids a catastrophic risk. A culture of honesty and ethics, antifraud processes and controls, and an appropriate oversight process are the best practices for the prevention and detection of fraud.

In 2002, after a chain of highly publicized corporate scandals, Congress passed the Sarbanes-Oxley Act, intending to restore investor confidence in publicly traded securities. Traditionally, management and the board of directors were in charge of managing the company and preparing financial statements. However, this new law makes it clear that they are also in charge of creating, confirming and supervising effective internal controls in order to avoid fraudulent financial reporting. When fraudulent financial reporting does arise, they are expected to detect it in a timely manner. (PricewaterhouseCoopers, 2003) Common issues considered to be the primary factors that allow fraud to occur consist of a lack of internal controls and internal controls that are overridden by the perpetrator in order to commit and conceal fraud (Figure 1).

Antifraud programs and controls are now required of companies that are subject to the Sarbanes-Oxley Act. Most companies already have in place codes of ethics and conduct which are components of an antifraud program. Nevertheless, the companies may now have to improve their programs in order to meet the requirements of the new regulation. Since the antifraud programs and controls are now evaluated annually during the integrated audit, an improvement in their programs is beneficial in avoiding an auditor’s finding of a significant deficiency or material weakness in internal controls. In the United States, the Committee of Sponsoring Organizations of the Treadway Commission has published a framework that most companies and auditors use to evaluate the effectiveness of internal controls. The components of an effective antifraud program and controls have yet to be outlined by Congress, the SEC and PCAOB. However, there are important factors of an effective antifraud program based on the core principles shared by the new law, regulations and standards. These important factors consist of prevention and timely detection of fraud. (PricewaterhouseCoopers...

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