Week 9 - Preventing Fraud and Risk Management

Organisations traditionally focus on internal controls to battle fraud and misconduct. Although I think this is both a great place to start and a good thing to do, internal controls will not offer complete protection against fraud. Unfortunately, many organizations have no insight into the behavioural factors of employees. These organizations tend to take a legalistic approach and focus primarily on battling fraud by adding more “opportunity” controls (Cressey, 1973). Doing so might even result in bureaucratic and costly internal control systems with many sign-offs, yet they still experience incidents of non-compliance. An example of this effect is the approach that some companies have made toward implementing the Sarbanes-Oxley internal control frameworks. The frameworks required a lot of paperwork, yet according to many employees, it added little in terms of actual control against unethical behavior ultimately having an adverse effect because of this ineffectiveness (Dittmar, 2006).

I believe a more appropriate way for fraud management will also need to incorporate the behavioral factors of the Fraud Triangle, namely the “Pressure” and “Rationalization” factors. In particulars, to assess the pressure factors is to have an integrity survey with employees. The following step in training employees for them to be aware of and alert for possible rationalisations is to provide dilemma training.

By establishing such an approach to internal control will lead to a much more effective internal control and also a more cost efficient one as well.

Reference

Donald R. Cressey, Other People's Money (Montclair: Patterson Smith, 1973) p. 30.

Dittmar, S. W. (2006). The Unexpected Benefits of Sarbanes-Oxley. Harvard Business Review.