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Weekly UpdatesThis checklist is about how to spot fraud. The focus is on how an organisation, whether in the private or public sector, can put simple measures in place to prevent fraud. The underlying idea behind the checklist is that everyone has a role in the process of spotting and preventing fraud.
In extreme cases, fraud has led to the total collapse of companies, leading to substantial job losses, zero-value shares, pensions shortfalls, imprisonment and extreme embarrassment.
A recent survey suggests that many directors consider that the two most effective ways of preventing and detecting fraud are the normal internal controls and the internal audit. (Fraud--risk and prevention, CBI).
It is not only employees who attempt fraud. It can be committed by external third parties acting independently, for example, by submitting invoices for bogus goods or services.
Management Standards
The checklist has relevance to the MSC National Occupational Standards for Management: Key Role B--Manage Resources.
Definition
The following is based on the Audit Commission definition. Fraud is:
Fraud is not just limited to the misappropriation of funds. It also includes the theft of stock or equipment or other assets, as well as, for example, false claims for payment for goods or services not delivered.
Advantages
There are many obvious advantages to spotting fraud. These include:
* saving money--it has been estimated that fraud costs the private sector alone 9 billion [pounds sterling] a year
* avoiding damage to morale--no one wants to work for an organisation where fraud is rife and never investigated
* accountability--tackling fraud is one aspect of public, shareholder and stakeholder accountability.
Disadvantages
If you don't tackle fraud:
* it can seriously damage the organisation's reputation
* it can affect the confidence of your organsation's funders, shareholders, customers and service users.
Action checklist
The following checklist will help you to spot and tackle fraud. There are two elements to tackling fraud:
* putting systems in place
* putting an anti-fraud culture in place.
Putting systems in place
1. Write a fraud strategy statement
Write guidelines to help answer questions such as:
* when does pilfering become fraud and hospitality or perks become corruption?
* can staff accept any gifts?
Without guiding principles, it is difficult for people to differentiate between what is accepted custom and practice and what is not acceptable. So, set out a strategy on financial probity.
Try to develop a separate procedure which spells out clearly:
* who is responsible for dealing with fraud
* the stages involved in raising and dealing with a concern.
2. Set up an audit committee
Larger companies should establish an audit committee that can be a useful way of setting the framework for fraud control. The committee should consist of senior stakeholders from a range of different departments (people who have insight into the causes of fraud and sufficient influence to make any recommended changes stick) and committee members (if your organisation has a committee).
Smaller organisations should seek professional advice.
The job of an audit committee is to:
* help to design fraud prevention measures and develop a more effective fraud prevention system
* review the organisation's anti-fraud strategy.
* help to investigate examples of malpractice and suggest action when they are uncovered.
The audit committee can act as a reporting line for an organisation's internal auditor. It acts as a guiding and controlling influence, a policy and strategy forum and a vehicle for accountability.
3. Tighten up anti-fraud procedures
Poorly documented procedures contribute to fraud.
4. Make the most of information technology
Organisations often hold large amounts of information, and in particular, financial information. Fraudsters often perpetrate their crimes because one department does not know what the others are doing--this may give them the chance to carry out multiple fraud. Integrated and relational databases enable organisations to cross-reference information--internally and indeed with other organisations. Use information technology to share information and spot fraud where it is occurring. Many local authorities, for example, share information about people who claim multiple housing benefit. This has proved a highly effective weapon against fraudsters.
5. Establish procedures for an effective fraud investigation
The following is based on a good practice checklist for an effective fraud investigations:
* appoint a steering officer for the investigation
* agree the target dates and key issues
* hold steering meetings to discuss progress, agree variations and identify future targets
* identify the actions required
* consider the likely outcomes, i.e. internal disciplinary action or prosecution
* if the indications appear serious, contact the police at an early stage and get their advice.
Putting an anti-fraud culture in place
Creating the right environment to tackle fraud needs a range of initiatives, some of which are difficult to evaluate but important nonetheless. In many organisations there is a good deal of apparently trivial fraud which is accepted as the norm. Changing this perception, and changing this practice, can be difficult, and cause some resentment.
1. Leadership from managers
Any initiative aimed at openness is only as good as its leaders. It is likely that there may be some cynicism from staff about any new approach. They may well have had experience of concerns being brushed under the carpet in the past. The message about fraud and corruption needs to come clearly from the top and be reinforced with action.
2. Make communication work
Involve your employees, listen to their sense of right and wrong. Explain what fraud is and the effect it has on their jobs and the services they provide to their customers (both internal and external).
* Make it known how seriously you treat the problem.
* If it is fraud, call it fraud when you find it.
* Use seminars, newsletters and briefing sessions to explain your commitment to tackling fraud and to report on your successes.
3. Other anti-fraud training
Any new system needs to be reinforced with training. You can use training to stress your key messages about fraud and the need for vigilance and openness and to explain the way the system works. More importantly, training can also help to instil new coaching and counselling skills that managers will need to handle concerns effectively.
4. Whistleblowing
It is important to open up routes through which concerns about fraud can be channelled. Apart from line managers, staff need the option of another route to raise their concerns. This could be the Chief Executive or finance officer, an employee in internal audit or another named senior manager in a larger business. Staff should feel able to raise their concerns, in strict confidence, without recrimination.
A final word
The measures above are suggestions. You may already do many of the things mentioned. The key is to keep a balance between the procedures and guidelines and to work at developing a feedback culture.
Dos and don'ts for spotting fraud
Do
* Take fraud seriously.
* Define it clearly.
* Set up a system to deal with it.
* Reinforce key messages about fraud for senior managers.
* Act and be seen to act when you uncover fraud.
Don't
* Brush fraud under the carpet.
* Be soft on it.
* Block your ears to the concerns of staff--they are the ones who are most likely to spot fraud.
* Just put a system in place without working on the softer culture issues.
Useful reading
Books
Useful addresses
Related checklists
* Internal audit
* Managing risk
Thought starters
* There are many ways by which fraud can be attempted.
* In many cases fraud has continued undetected for years.
* Are your anti-fraud procedures clear and thought through?
* Are staff encouraged to voice concerns?
Further information
Checklists are available in the following formats:
* Individual checklists.
* A complete set of 195 on CD-ROM or in hard copy
* Checklists with permission to photocopy.
Full details of the range of checklists which are available can be obtained from:
Lavis Marketing, 73 Lime Walk, Headington, Oxford, OX3 7AD Tel: 0845 702 3736 (local rate call) Fax: +44 1865 750079 or from Checkpoint on the Chartered Management Institute's website at www.managers.org.uk
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