Fraud management is a set of policies and procedures implemented by companies to prevent and detect internal employee fraud. This process involves assessment, prevention, detection, investigation, mitigation, and corrective actions. The US passed laws to increase management’s legal responsibilities for active employee fraud protection. Large companies employ dedicated staff to manage internal fraud. Fraud management addresses eight categories of activities, including deterrence, prevention, detection, investigation, mitigation, prosecution, analysis, and policy. Analyzing why fraud occurs within a particular company is as important as detecting and stopping it.
Fraud management is a system of policies and procedures implemented by a company to detect and mitigate the internal risk that employees commit illegal acts against the interests of the company to enrich themselves. While every business establishes its own specific procedures, fraud risk management typically involves assessment, prevention, detection, investigation, mitigation, and corrective actions. The process is often managed by internal auditors or an anti-fraud department with occasional help from external auditors and other business consultants.
In the early 2000s, the US corporate economy was significantly affected by fraud scandals involving senior executives of a number of large corporations. Lawmakers felt the scale of the crimes undermined public confidence in the country’s financial systems and markets. A series of laws were passed that increased management‘s legal responsibilities for active employee fraud protection, established stricter management and reporting requirements, and introduced tough penalties for non-compliance. As a result, fraud management has become a necessary functional process.
Large companies employ dedicated staff members who are responsible for internal fraud management. These types of internal controls are distinct from the procedures a company might adopt to detect external fraud committed by customers or other third parties because the internal process only addresses employee misconduct. Internal fraud statistics have established that the majority of major frauds are committed by senior management. When a senior executive crosses that line, the scope tends to be significant and the damage to the company’s public image catastrophic.
A company’s anti-fraud team establishes policies and procedures to create an atmosphere of vigilance and zero tolerance within the company. After conducting an assessment, Comprehensive Fraud Management addresses eight categories of activities. The team will initially deal with deterrence and prevention. This could take the form of enhanced security systems, redundant authorizations for high-risk transactions, employee training, or written policies to clarify expectations.
Fraud management would then take care of the detection and investigation. Detection could include the company hiring an external accounting firm to conduct a fraud audit of financial transactions. The investigations carry out the necessary acts to determine the culprits. Once the parties involved have been identified, the team will move on to mitigate the damage and prosecute the culprits. New corporate standards favor prosecution over internal resolution of fraud cases in the belief that public punishment restores trust and serves as an additional deterrent.
The last two steps of the fraud management cycle are analysis and policy. Sometimes internal fraud can be traced to a particular climate in certain departments or the general attitude of certain employees. Analyzing why fraud occurs within a particular company is as important as detecting and stopping it. This analysis guides the definition of the correct company policies to make internal fraud an unthinkable option.
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