ACCA-IIA Singapore Seminar 2015 part 2 fraud risk governance
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This document discusses leveraging internal control processes to prevent and manage internal fraud. It begins by noting that internal auditors working with management can enhance effectiveness and efficiency in real time, while external auditors cannot help with fraud detection. Fraud is the result of material weaknesses in internal controls. The document then outlines principles and theories for establishing an effective fraud risk management program, including having a written fraud policy, conducting fraud risk assessments, implementing prevention and detection controls, and establishing procedures for investigation, corrective action, and monitoring. Key roles for the board, management, internal auditors, and all staff are discussed for building an anti-fraud culture and governance structure.
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ACCA-IIA Singapore Seminar 2015 part 2 fraud risk governance
- 1. Leveraging your internal control process to prevent and manage internal fraud Tuesday, 6 October 2015 9:00am – 5:00pm ACCA-IIA Singapore Seminar Part 2 1
- 2. 2 Internal Auditor working with Management Team will enhance Effectiveness and Efficiency of Operations on a real time basis. An area External Auditor cannot help Fraud is a consequence of Material weakness in Internal control 2
- 3. Looking for Red Flags The weakest links in chain of controls? Deviations from conventional good accounting practices are possible? What are the simplest way to compromise the system? 3 (Source 1)
- 4. Identifying Red Flags 4 Potential Fraud Schemes Common Red Flags relevant to specific fraud scheme Obtaining the evidence Confronting suspects Report findings
- 5. Sources of information Disclosures Filings with regulators e.g. SFC Company Registry Land office Industry specific bureaus Public Records e.g. internet Confidential sources Internal records But note personal data privacy issues 5 Other Regulating Agencies or Government Agencies
- 6. 6
- 7. Fraud Risks Management Why traditional internal control fail? Why did External Auditor fail to indentify fraud? How to build an effective Fraud Risks Management Programme in your organization? 7
- 8. Managing the Business Risk of Fraud: A Practical Guide Sponsored by – 1) Institute of Internal Auditors, 2) American Institute of Certified Public Accountants, 3) Association of Certified Fraud Examines. Intended to be applicable globally Defines principles and theories for fraud risk management 8
- 9. Key Principles 1. Fraud Risk Management Program 2. Fraud Risk Assessment 3. Fraud Prevention 4. Fraud Detection 5. Escalation, Investigatio n and Correction 9
- 10. Principle 1 As part of an organization’s governance structure, a fraud risk management program should be in place, including a written policy (or policies) to convey the expectations of the board of directors and senior management regarding managing fraud risk. 10
- 11. Key Principles 11 1. Fraud Risk Management Program 2. Fraud Risk Assessment 3. Fraud Prevention 4. Fraud Detection 5. Escalation, Investigation and Correction Fraud Risk Management Program • Policies and procedures • Roles and responsibilities • Commitment • Fraud awareness • Affirmation process • Conflict disclosure • Fraud risk assessment • Reporting procedures and whistleblower protection • Investigation process • Corrective action • Quality assurance • Continuous monitoring
- 12. Fraud Risk Governance Source (4) Corporate Governance System by which companies are directed or controlled Process by which corporations are made responsive to Rights + Wishes Of Stakeholders Manner in which management and those charged with oversight accountability meet their Obligations + Fiduciary Responsibilities To Stakeholders 12
- 13. Fraud Risk Governance (Source (4) Strong Board Governance Practices Board ownerships of Agendas + Information flow Access to multiple layers of Management + Effective control of a whistleblower hotline Independent Nomination Processes Effective evaluation of Senior management, Performance management, Compensation and Succession planning A code of conduct SPECIFIC for senior management, In addition to organization’s code of conduct Strong emphasis on board own independent effectiveness and process through: • Board evaluations • Executive sessions • Active participations in oversight of strategic and risk mitigation efforts 13
- 14. Fraud Risk Exposure Source (4) Board Assurance Business Ethics Considerations Hiring, Evaluation, Promotion, Remuneration policies For Employees Ethical Behaviors Business strategy Operations Long-term Survival All aspects of Employee’s Relationship with Customers Vendors Other business stakeholders eg. Government Regulations 14
- 15. Fraud Risk Governance Source (4) Effective Business Ethics Programs Foundation Prevention Detection Deterring Fraudulent + Criminal Acts+ + 15
- 16. Fraud Risk Governance Source (4) Identify Roles + Responsibilities Personnel at all levels of organization Fraud Policy Who is responsible for oversight of fraud control Board Designated committee eg. Fraud Prevention Committee Management’s Responsibility Design Implementation of Fraud Risk Strategy How different segments of organization can support Fraud Risk Management eg. compliance, general counsel, the ethics office, security, IT, internal auditing, audit committees16
- 17. Fraud Risk Governance Source (4) Board of Directors Set the tone at the top. How to govern properly? Include: • Independent minded Executive Directors • Understand fraud risks • Fraud risk is included as part of organization’s risk assessment and strategic plans • Periodic agenda item • Monitor management’s reports on fraud risks, polices, and control activities • Receiving accurate and timely information on fraud incidents from all levels • Oversee internal control • Set the appropriate tone at the top-through CEO job description, hiring evaluation and succession • Ability to engage outside experts • Providing external auditors with evidence of Board’s active involvement in fraud risk management17
- 18. Fraud Risk Governance Source (4) Delegation of some responsibilities to a committee of that Board Documented in the Board and committee charters Ensure the committee has sufficient resources in the budget and long-term plan to enable the organization to achieve its fraud risk management objectives 18
- 19. Fraud Risk Governance Source(4) Audit Committee Independent Plus one financial expert Meet regularly Long enough Sufficient preparation Assess Respond+ Risk of Fraud Receive reports of alleged fraud Especially Management Fraud (Override internal control procedures) 19
- 20. Fraud Risk Governance Source (4) Audit Committee The proactive approach Maintains active role Oversight of the organization’s assessment of Fraud Internal Auditor Designated Personnel Monitor Fraud Risk Existence of this committee = Evidence that the committee is committed to fraud risk management 20
- 21. Fraud Risk Governance Source(4) Audit Committee Should meet separately from management with appropriate individuals eg. Chief Internal Auditor And Senior Financial Person To find out how internal and external audit strategies address fraud risk Auditor Management What are they doing to prevent fraud??? 21
- 22. Fraud Risk Governance Source(4) Audit Committee How an External Auditor perform the audit of financial statement Free of Errors Or Fraud? Knowing there are limitations Governed by auditing standards Insist on honesty + Openness with External Auditor Sharing information about possible fraud Aware of reputation risk resulting from Seek legal advice on allegations of fraud Should be taken seriously- a duty to investigate + report 22
- 23. Fraud Risk Governance Source(4) Management Responsibility Design + Implement of a Fraud Risk Management Program Including Set the tone from the top Culture of honesty + compliance 23
- 24. Fraud Risk Governance Source (4) All levels of staff (including management) Basic understanding of fraud including aware of red flags Cooperate in investigations Under their roles within internal control framework How their working procedures are designed to manage fraud risks Non- compliance = Fraud not detected Read + Understand policies+ procedures on fraud eg. • Code of conduct • Fraud policy • Whistleblow er policy Operational procedures- procurement manuals + If required – help to build a strong control environment Report suspicions of fraud 24
- 25. Fraud Risk Governance Source (4) Internal Auditing Definition - IIA Independent, objective assurance + consulting activity Design to add value + improve an organization’s operations In relation to Fraud Provides assurance to the Board – The controls they have in place are appropriate given the organization’s RISK APPETITE 25
- 26. Fraud Risk Governance Source( 4) Role of Internal Auditors Considerate organization’s assessment of fraud risk Review management’s fraud management capabilities periodically Review + Communicate with those conducting risk assessment Help them to ensure that all fraud risks have been considered appropriately 26
- 27. Fraud Risk Governance (16) Internal Auditors Specific Roles • If required to perform these duties • IA must have the necessary skills + Knowledge • Law • Fraud schemes • Investigation techniques Initial or investigation of suspected fraud Root cause analysis Control improvement recommendations Monitoring of a reporting or whistleblowing hotline Providing ethics training sessions 27