The Anti-Fraud Collaboration Report On Building A Fraud Resistant Organization

The Fraud-Resistant Organization: Tools, Traits, and Techniques to Deter and Detect Financial Reporting Fraud report as published by the Anti-Fraud Collaboration (Collaboration) is meant to act as a guide for public companies in both deterring and detecting financial reporting fraud.

Of note, this report focuses on “a material misrepresentation in a financial statement resulting from an intentional failure to report financial information in accordance with generally accepted accounting principles.”

Through their research, they have determined that while financial reporting fraud constitutes only 9% of occupational fraud of those surveyed, it is the most costly form of fraud coming in at a median loss of $1 million.

The Collaboration found three common conditions in companies where fraud had occurred; those

1. lacking a strong “tone at the top”
2. lacking a sufficient amount of skepticism by all members within the financial reporting supply chain
3. lacking in communication amongst financial supply chain  members

They go on to say that companies with a strong tone at the top, consistent throughout their geographical spread, combined  with an understanding of each of the players’ responsibilities as well as a good amount of ethics, skepticism and communication, had a much lower likelihood of financial reporting fraud occurring.

Management is primarily responsible for the tone of the company and the strength of its ethical culture. Honesty must be the standard, while questioning and skepticism of the numbers by those responsible for them must be encouraged.

Board members are expected to know what comprises the company’s revenue and profitability, to be active and communicative, and to be able to recognize weaknesses in the management’s tone. They need to understand the numbers in order to properly, and thoroughly, question them.

The Sarbanes-Oxley Act has made it much easier for audit committees to be able to act on suspicions of fraud. Skepticism toward the numbers as well as monitoring the internal controls are required steps when trying to prevent and detect fraud.

The Collaboration calls the internal audit function  the “eyes and ears of an organization”. They need to be able to operate independently from the organization and use skepticism when reviewing the numbers. They are also expected to look for and address internal control, risk management and/or governance weaknesses.

Expect external auditors to draw on their knowledge and auditing experience at other companies and institutions to place them in a better position to question and review financial statements, assessing risk and testing internal controls.

Communication, skepticism and an understanding of the pressure, opportunity, and rationalization behind the temptation to commit fraud in financial reporting are the tools required of all employees of companies taking a proactive stance in deterring and detecting financial reporting fraud.

Read the entire Fraud-Resistant Organization: Tools, Traits, and Techniques to Deter and Detect Financial Reporting Fraud report.