Financial losses caused by fraud annually are confirmed to be significant. Research indicates that organizations, on average, lose five percent of their revenue because of fraud. However, the full cost of fraud is even higher than just the loss of money, given its impact on time, productivity, reputation, and customer relationship. Thus, it is important for the organizations to have a strong fraud management that includes awareness, prevention and detection measures. The risk of fraud can be reduced with basic prevention and detection internal contrls and effective audits and oversight.
Fraud Prevention and Detection
Fraud Prevention: Fraud preventions involves those actions taken to discourage the commission of fraud and limit the possibility of fraud from occurring.
Fraud prevention mechanisms include;
- Fraud Training: is usually key factor in the deterrence of fraud. Employees must understand the ethical behavior expected of them to act accordingly within the organization.
- Organizational Culture: Instilling a strong ethical culture and setting the correct tone at the top.
- Internal Control System: Effective internal controls are one of the strongest deterrents to fraudulent behavior and fraudulent actions. Simultaneous use of preventive and detective internal controls enhances any fraud risk management program’s effectiveness.
Fraud Detection: Fraud detection entails activities and programs designed to identify fraud or misconduct that is occurring or has occurred. Fraud detection often relies on detective controls that are designed to provide warnings or evidence that fraud is occurring or occurred. Detective internal controls are not intended to prevent fraud. They are intended to detect and provide evidence that fraud exists.
Forensic Auditing refers to the application of auditing skills to situations that have potential legal implications and/or consequences. The role of forensic auditing is to facilitate the prevention, detection and/or investigation of fraud. During the audit, the evidence gathered by the auditor could be presented in a court of law.
Typical applications of forensic auditing include audits during which the auditor is investigating for fraud. It would be used when the auditor has suspicions about fraud, and thus, the auditor requires forensic evidence to prove or negate the suspicions, identify the parties involved, and gather and maintain evidence that may be subsequently presented in disciplinary or criminal proceedings.