Managing Fraud Risk: A Practical Guide for Directors and Managers

Introduction

Fraud is hidden. It is often carried out by individuals who have worked in their organisation for a long time and have good knowledge of its systems and procedures, as happened in the case I describe above. It is therefore difficult to detect fraud. This Chapter looks at the key detective measures, those controls and techniques that have proved to be most successful at uncovering fraud schemes in practice.

We begin this Chapter, however, with a review of the most under-used component of the Fraud Risk Management Framework, that of deterrence. Deterrence means the modification of behaviour by the threat of sanctions. A key concept of fraud deterrence is “the perception of detection”. According to this concept, an individual who is considering committing fraud will be unlikely to proceed to the act if he or she believes that the consequences will be that they are caught, prosecuted and jailed. We discuss a number of deterrence measures that are available to all organisations but which are not often adopted in practice. Partly this is down to ignorance. But it is also the result of a failure of senior management to tackle resistance to change. For example, surprise or spot audits have been shown to have a big impact, but they are not popular with operational managers. Discussing fraud risk as part of routine audit or management reviews is also an effective way of demonstrating that fraud is taken seriously within the organisation. The problem here is that fraud is thought ...