Frauds are often happening today in the world. In the most cases, financial institutions are experienced well in financial frauds. Talkwithreshan today talking about financial frauds and safeguards against committing frauds that can be applied by the management to avoid frauds in the organization.
What is Financial fraud: Fraud is an intentional act by one or more individual, including employees, management, those charged with governance or third parties, involving the use of deception to obtain an unjust or illegal advantage.
Fraudulent financial reporting may happen in terms if
- Manipulation, falsification or alteration of accounting records or supporting documents.
- Misrepresentation or omission of events of transactions in the financial statements.
- Intentional misapplication of accounting policies.
- In practically, most of time employees are motivate to commit fraud.
Let me explain the fraud, according to fraud triangle theory. Fraud triangle comprises with Incentive/pressure, opportunity and rationalization components. As explain the fraud triangle theory, above, three requirements should have completed at same time.
01. Opportunity: this is referring to the instance that allow to individual or group of individuals of management, those charge with governance, employees or third parties to occur a fraud. Because of weak internal controls people who have intention to commit fraud will motivate. For example, less segregation of duties, lack or no supervision and weak documentation process results to raise opportunities for fraud. Inadequate accounting polices and lower tone of management also examples for opportunities for frauds.
02. Incentive or pressure: if an individual or group of employees, management or third parties are in big pressure. Sometime for example, due to adverse changes in the economy, it may badly effect to low salaried employees. At such point,employees commit to frauds for personal benefit. In other hand, if the management has established unreachable incentives, employees may manipulate information with the intention of getting incentive.
03. Rationalization: it is referring to an individual’s justification for committing fraud. In most cases, due to override of internal controls by the top management, employees also not afraid to break policies established through internal control systems.
How to avoid financial frauds,
- Designing, implementing and establishing strong internal control over the organization. This is one of management responsibility of every company.
- Assign an independent person to review internal controls over the organization. It’s much more appropriate if the management can outsource internal auditor who has good professional competence to conduct internal audit effectively.
- Avoid overriding internal controls by the top management or senior management.
- Closely monitor internal control procedures and update with new policies.
- Integration of information technology with internal control systems. This is common in the current world. But such system should be updated with relevant security measures periodically.
- Segregation of duties: Management should not assign tasks start to end of a process to one employee. Sometime it may not be practical in small companies. In such case, the management should closely review the tasks of employees.
The fraud is wider concept, and have to talk in different perspectives. I believe above information of prevention of frauds are much enough for general use.
All the best! Thank you