Challenges faced by senior management and the Board in understanding fraud:
Enhanced focus on the consideration of fraud risks:
• Fraud risk is not considered top of the Board’s agenda due to the perceived low cost of losses due to fraud;
• Inordinate reliance on internal audit teams to tackle fraud risks;
• Limited understanding of what constitutes an effective fraud risk management program.
*Assess the types of frauds that can impact business:
Consider relevant types of fraud, such as fraudulent financial reporting, possible loss of assets, and corruption schemes through which fraud and misconduct can occur.
*Consider ways that fraud can occur :
Some of the factors to be considered, include:
• Management bias (e.g., in the selection of accounting principles)
• Degree of estimates and judgments in external reporting
• Vulnerability to management override and potential schemes to
circumvent existing control activities
• Understanding bribery and corruption risks
• Geographic regions, where the entity does business, and prevalent
fraud risks in that region
• Incentives that may motivate fraudulent behavior (e.g., identifying
the entity’s fraud risks, particularly when earnings pressures and
aggressive incentive compensation programs exist)
• Nature of technology and management’s ability to manipulate
• Unusual or complex transactions subject to significant management influence.
*Address fraud risks in light of changes in the operating environment:
Re-evaluate fraud risks as and when there are changes in the entity or external environment, such as regulatory changes or business environment.
*Understand fraud risks through business partners:
Assess the manner in which work is performed by vendors, outsourced agencies and other third parties doing business for and on behalf of the company.
*Review results of the fraud risk assessment undertaken:
Periodically review the results of the fraud risk assessment with the audit committee, and challenge the findings of the assessment for aspects, such as management override of controls.