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Why do Company Directors Fail in their Obligations of Fraud Prevention?

By Mark Jenner

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Published: 17Dec2009
Word count: 659
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What is the level of fraud protection that a business needs? There is no prescriptive formula for preventing fraud occurring and no amount of anti-fraud controls will ever stop fraud completely. However, there are a number of basic measures all organisations should be adopting no matter what their size if we are to successfully protect our economy from the fraudster.

According to estimates by the Association of Certified Fraud Examiners on average every business in the USA loses 5% of its gross turnover every year. This wastage is more than many companies make as profit! Some estimates put the level of losses due to fraud in the UK at up to £100 billion. This is like every working person paying an extra £5,000 income tax each and every year. It is clear that there is a vast amount of fraud actively being committed in the world and that current fraud prevention measures are not adequately protecting us.

For a business to reduce its risk of fraud, it must first have an anti-fraud culture. For example, if the work force sees the managers or owners of a business cut corners by paying suppliers 'cash in hand' to avoid Value Added Tax, they might also be tempted to be equally dishonest and falsify their expense claims.

So there must be a tone established from the most senior management that fraud or any financial impropriety will not be tolerated. This can be achieved by publishing a fraud policy document. Such a document may range from an expensive glossy brochure or booklet to a simple printed page of paper. What is important is that it sets out the organisation's position against fraud. It will detail what is acceptable behaviour to the firm and what is not. It should be circulated to everyone, and may even be supported by staff training sessions particularly for new starters. Setting out a robust stand against fraud can have a positive effect in reducing the likelihood of a fraudster targeting the business.

Many organisations will be audited every year and may hope that any fraud will be detected then. It may even hope that the auditors will advise how to protect themselves better against the fraudster. This is a mistaken belief because many frauds take place over one or more years and pass the audit process undetected.

The statutory annual audit, or the preparation of financial statements by the accountants in a smaller business, is not intended for detecting fraud. It is true that weaknesses in accounting controls may be highlighted, only if they impact the likelihood of the true and fair nature of the accounts. However, the fraudster is looking for that tiny chink in the company's armour and ways to steal unnoticed. A fraudster can wait until the audit is over and then devastate a business in a matter of days or weeks.

An ongoing review of the risk a business might be facing due to fraud is essential. Again this only needs to be relative to the size and sophistication of the organisation. Many public sector entities such as local councils and prime care health bodies are required by law to have fraud prevention reviews annually. These are usually conducted by either internal auditors or outside contractors. They involve a review of all fraud related accounting controls within the organisation which results in an overall score being awarded. Then when reviewed by central funding authorities the public body may be judged against this score when seeking an increase in next year's budget.

Other large private organisations should employ similar fraud teams, but the ongoing review of the business could just as easily be carried out by the owner of a very small business by taking a few minutes now and then to reflect on his financial security. By ignoring the need to be active in considering if a business is at risk from fraud puts that very business at risk, and sends out an invitation to the fraudster.

Mark Jenner is a forensic accountant and fraud expert. He is a Fellow of the Institute of Chartered Accountants in England and Wales, a Certified Fraud Examiner and holds a Masters Degree in Fraud Investigation Management. You can learn more about the fraud prevention strategies that he advises by visiting his fraud advice web site.

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