Insurance fraud from the perspective of asset protection presenter winston delahaye cfe m sc
1 / 61

What is Fraud? - PowerPoint PPT Presentation

  • Uploaded on

“Insurance Fraud, from the Perspective of Asset Protection” Presenter: Winston Delahaye; CFE, M.Sc. Fraud is a common risk that should not be ignored. The incidence of fraud is now so common that its occurrence is no longer remarkable, only its scale.

I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
Download Presentation

PowerPoint Slideshow about 'What is Fraud?' - jamuna

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
Insurance fraud from the perspective of asset protection presenter winston delahaye cfe m sc
“Insurance Fraud, from the Perspective of Asset Protection”Presenter: Winston Delahaye; CFE, M.Sc.

What is fraud

Fraud is a common risk that should Protection”not be ignored. The incidence of fraud is now so common that its occurrence is no longer remarkable, only its scale.

Any entity that fails to protect itself appropriately from fraud should expect to become a victim of fraud, or rather, should expect to discover that it is a victim of fraud.

What is fraud
What is Fraud? Protection”

  • It is any illegal acts characterized by deceit, concealment or violation of trust.

  • These acts are not dependent upon the application of threat of violence or of physical force.

  • Frauds are perpetuated by individuals and organizations to obtain money, property or services; to avoid payment or loss of services; or to secure personal or business advantage.

Historical perspective
Historical Perspective Protection”

The oldest available recorded instances of fraud occur in the Bible:

  • Genesis 3:13

    ‘Inter alia’…….and the woman said, ‘the serpent tricked me, and I did eat.’

  • Genesis 27:11-12

    11 - And Jacob said to ……his mother, ‘Behold, Esau my brother is a hairy man, and I am a smooth man

    12 - My father peradventure will feel me, and I shall seem to him as a deceiver……..’.

The impact of fraud on insurance globally
The Impact of Fraud on Insurance Protection”Globally

According to a recent Federal Bureau of Investigations report on financial crimes, approximately US$1 trillion dollars is collected in insurance premiums annually.

The report also stated that health care expenditures represented approximately 16.5% of Gross Domestic Product of the US economy and that by 2012 the total health care spending will exceed US$ 3.3 trillion.

The impact of fraud on insurance globally1
The Impact of Fraud on Insurance Protection”Globally


  • Billions of dollars are lost every year in insurance fraud.

  • Some countries including the US have compiled some statistics in their attempt to combat this expensive economic crime.

  • For example, the INSURANCE INFORMATION INSTITUTE FACT BOOK 2004, claims that insurance fraud cost insurers and corporate buyers of insurance more than US $80 billion.

  • The COALITION AGAINST INSURANCE FRAUD (CAIF) contends that although it is hard to determine how big insurance fraud has gotten because so much goes undetected, and a complete research has yet to be done, they do know that :

The impact of fraud on insurance globally2
The Impact of Fraud on Insurance Protection”Globally


  • Healthcare fraud costs Americans $54 billion a year.

  • According to a study by the RAND INSTITUTE FOR CIVIL JUSTICE, more than a third of people hurt in auto accidents exaggerate their injuries to the tune of an extra $13 – $15 billion in insurance costs.

  • The JOURNAL OF THE AMERICAS MEDICAL ASSOCIATIONstates that, Nearly a 3rd of doctors inflate the severity of a patient’s illness to help them avoid early hospital discharge.

  • The CAIFstates that fraud schemes result in;

    - the loss of a person’s savings,

    - endangering their health,

    - constant increase in premiums and consumer goods,

    - loss of jobs and,

    - in some Instances, loss of life or quality of life.

The impact of fraud on insurance regionally
The Impact of Fraud on Insurance Protection”Regionally

The impact of fraud on insurance regionally1
The Impact of Fraud on Insurance Protection”Regionally

The impact of fraud on insurance regionally2
The Impact of Fraud on Insurance Protection”Regionally

The impact of fraud on insurance regionally3
The Impact of Fraud on Insurance Protection”Regionally

  • St. John’s, Antigua, April 2002 - three investigating judges have been charged with figuring out where $230 million or more in state health insurance money has gone.

  • Kingston, Jamaica, July 2005 - MARK Thwaites, the former chief operating officer of the bankrupt Dyoll Insurance Company, faced the …..Court …on charges of insurance fraud.

  • Kingston, Jamaica, Sept. 2006 - Insurance fraud exposes firms and motorists: The insurance industry is losing millions of dollars in premiums due to a mushrooming cover note racket, major players in the market have revealed. While unable to place an exact dollar figure on the losses, stakeholders said that it has long passed 6 figures.

  • Guyana, Feb. 2007 - Guyanese police are questioning five employees of Clico Life Insurance in Guyana and seeking two others in connection with a $16 million fraud detected at the company.

The impact of fraud on insurance regionally4
The Impact of Fraud on Insurance Protection”Regionally

  • Trinidad & Tobago, May 2008 - Chairman of the Inter-Insurance Fraud Committee of the Association of Trinidad and Tobago Insurance Companies (Attic) Philip De Silva, said yesterday that incidents of fraud could hurt T&T’s chances of becoming the international financial centre of the region.

  • Trinidad, January 2007 - The Goodwill Scandal: No 'goodwill‘ at Goodwill - Goodwill General Insurance Company Ltd and its brokers and agents continued to issue new motor insurance policies in violation of a March 7, 2006 directive from the Central Bank to not write new business or renew policies.

  • Barbados, October 2005 -While not admitting that it did anything wrong, Doctors Benefit Insurance Company Limited (DBIC) of Barbados has agreed to pay the United States Internal Revenue Service (IRS) US$2.3 million (BDS$4.6 million) for selling supplemental disability policies to 2,800 doctors in the United States under the guise that the premiums were fully tax deductible.

Types of insurance fraud
Types of Insurance Fraud Protection”

  • Insurance fraud may be classified as “hard” or “soft.”

  • Hard fraud - is a deliberate attempt either to stage or invent an accident, injury, theft, arson or other type of loss that would be covered under an insurance policy.

  • Soft fraud is sometimes called opportunity fraud and occurs when a policyholder or claimant exaggerates a legitimate claim.

    • For example, A car owner involved in a “fender bender” who pads the claim to cover the policy deductible is committing soft fraud.

    • Another example is exaggerating the number and value of items stolen from a home or business.

Types of insurance fraud1
Types of Insurance Fraud Protection”

  • Soft fraud may also occur when people purposely provide false information to influence the underwriting process in their favour when applying for insurance.

    • To lower insurance premiums or increase the likelihood that the application for insurance will be accepted, people may underreport the number of miles driven,

    • misrepresent where a car is garaged,

    • fail to provide an accurate medical history when applying for health insurance or,

    • falsify the number of employees and the nature of their work for workers compensation coverage.

Types of insurance fraud contd


Cash, Loan, and Dividend Checks

A company employee without the knowledge of an insured

or contract holder requests cash, loan or a dividend cheque

and either deposits the cheque into his bank account or

into a fictitious account. The employee, in order to

minimize his chances of being detected committing a

fraudulent act, might change the company policyholder’s

address of record to either his address or a fictitious

address. Once the cheque is issued, the address is then

changed back to the previous address.

Types of insurance fraud contd1

Settlement Cheques

Company employees can misdirect settlement cheques such as

Matured Endowment, paid Up, etc., to the branch office, to their

homes, or to a fictitious address. The employee can easily create a

cheque defalcation by changing the address of record prior to the

settlement date then replacing the contract holder’s correct address

after the settlement cheque has been received and fraudulently issued.

This is particularly possible with Orphan policy/contract holders whose

whereabouts are unknown, agents have left, or/and they have been

assigned to a servicing agent.

Agent broker types contd

Premium Fraud

Agent collects the premium, but doesn’t remit the cheque to the insurance

company. The insured has no coverage.

Fictitious Payees

An agent or a clerk can change the beneficiary of record to a fictitious person

and subsequently submit the necessary papers to authorize the issuance of a


Fictitious Death Claims

An agentor employee obtains a fictitious death certificate and requests that a

death claim cheque be issued. The agent receives the cheque and cashes it.

The sales representative can also write a fictitious application and, after the

contestable period (usually two years), submit a phony death claim form and

obtain the proceeds. The agent therefore, by investing a few thousand dollars

could obtain far more from this fraudulent claim.

Underwritng irregularities

Equity funding

Thisis the process of using existing premium / policy values to finance new

businesses. As long as the insured is aware of what is being done by the agent

and fully understands the long range method of payment on the new payment

contract, there is no apparent underwriting irregularity.

Equity funding techniques, also known as piggybacking, usually do not produce

Quality business. Furthermore, the company increases the amount of life

Insurance on the books but receives little or no new funds while incurring

increased sales and administrative expenses associated with the issue of that

new business. Equity funding irregularities might involve improper financial

benefits to field personnel as well as annual incentive bonuses paid to

management if applicable.

Underwriting irregularities contd


This might occur if a sales representative makes a false statement with

the intent to deceive the prospective insured in order to knowingly

obtain an unlawful gain.

False Information

A company employee might submit the following false information to

obtain an unlawful gain :

  • Improper medical information to obtain a better insurable rate for the prospective policyholder, i.e. standard to preferred rate.

  • Improper date of birth to obtain a cheaper premium on the new policy.

  • Improper home address to obtain a cheaper premium for home or automobile insurance.

Underwriting irregularities contd1

Fictitious Policies

A salesman, in order to keep his position, or improve his writing record,

submits fictitious policies. Prior to leaving a company, an individual writes

fictitious policies called TOMBSTONE CASES to improve his commission pool

so that his compensation will be greater. TOMBSTONE means an agent

literally takes names from tombstones in a cemetery and writes new policies.

Some Jamaican companies call them LIGHTPOSTS.


The term used for including additional coverages in the insurance policy

without the knowledge of the insured. The extra charges are hidden in the

Total premium and since the insured is unaware of the coverage, few claims

are ever filed. For example, accidental death and travel accident coverages can

usually be slipped into the policy without the knowledge of the insured.

Underwriting irregularities contd2


This is the replacement, usually by high pressure sales techniques, of

existing policies for new ones. The primary reason, of course, is for the

agent to profit since first year sales commissions are much higher than

commissions for existing policies.


This occurs when agents falsely tell customers that they can buy

additional insurance for nothing by using built-up value in their current

policies. In reality, the cost of the new policies frequently exceeds the

value of the old ones.

Vehicle insurance schemes


Also known as owner give-ups, is getting rid of a vehicle to cash in on an

insurance policy or to settle an outstanding loan. The vehicle is normally

expensive and purchased with a small down payment. The vehicle is reported

stolen, stripped for parts or taken to a pound and destroyed. The scheme

sometimes involves homeowner’s insurance for the property that was “stolen”

in the vehicle.

Past Posting

This is a scheme in which a person becomes involved in an automobile

accident, but doesn’t have insurance. The person gets insurance, waits a little

bit of time, and then reports the vehicle as being in an accident, thus collecting

for the damages.

Vehicle insurance schemes contd

Vehicle Smuggling

This scheme involves the purchase of a new vehicle with maximum

financing. A counterfeit certificate of the vehicle’s title is made showing

that it is free and clear. The vehicle is insured to the maximum, with

minimum deductible theft coverage. It is then shipped to a foreign port

and reported stolen. The car is sold at its new location and insurance is

also collected for the “theft.”

Vehicle Repair

This involves the billing of new parts on a vehicle when used parts

were actually replaced in the vehicle. Sometimes this involves collusion

between the adjuster and the body repair shop.

Vehicle insurance schemes contd1

Phantom Vehicles

The certificate of title is a document that shows the legal ownership of a

vehicle, even though it is not absolute proof that a vehicle exists, it is the basis

for the issuance of insurance policies. Collecting on a phantom vehicle has

Been shown to be easy to do.

Staged Accidents

Two drivers purposely collide where they will not be observed. Additional

damage may be added to the vehicles after impact. The cars are then driven to

a road or highway and arranged so that the accident appears to have occurred

there. The police are then notified.

Vehicle insurance schemes contd2

Two Vehicle Accident

Perpetrators cause an accident and then lead the innocent driver to believe

that it was their fault.

Swoop & Squat

The victim is passed by two cars while driving. The car in the lead will cut in front of

the second, forcing it to stop abruptly. The victim rear-ends the second car while the

other driver speeds away. Victims usually accept responsibility for the accident,

thinking it is their fault for not paying attention. The rear-ended vehicle usually

contains the maximum amount of passengers possible, all with injuries.

Vehicle Identification Number (VIN) – Switch

These are the works of professionals who switch VIN numbers from vehicles w

wrecked, sold and reported as being repaired, to a stolen vehicle of the same make

and model.

Red flags of insurance fraud

  • Claim made immediately after policy inception or increase in coverage.

  • Insured has history of many claims and losses.

  • At inception, insured asked hypothetical questions about coverage in the event of a loss, similar to the actual claim.

  • Claim is not well documented, the insured is pushy, insistent on fast settlement, and is unusually well informed about insurance coverage and claims procedures.

  • Burglary loss claim include large, bulky property which is unusual for a burglary.

Red flags of insurance fraud contd

  • Personal or sentimental property normally seen among the lost property of a fire loss claim, is conspicuously absent.

  • Insured cannot remember, does not know, where claimed property was acquired, and cannot provide adequate descriptions.

  • Claim too perfect – insured already has receipts, other documentation, witnesses, and duplicate photographs.

  • Fire and theft loss claims involves recently purchased, expensive property, especially where insured cannot provide receipts, owner’s manuals, etc.

Red flags of insurance fraud contd1

  • Amount on claim differs from value given to police.

  • Insured is able to give police complete list of lost property on the day of the burglary or shortly afterwards.

  • Documentation provided by insured is irregular or questionable such as:

    - numbered receipts from the same store and dated differently or non-


    - documents show signs of alteration of dates, descriptions or


    - insured apparent handwriting on receipts, invoices or appraisals;

    - incorrect computation of tax;

    - receipts, invoices, or shipping documents not stamped “paid,” or


Red flags of insurance fraud contd2

  • Physical evidence is inconsistent with the loss claimed by the insured, for example, in burglary loss there is no evidence of breaking and entering; in fire loss there is evidence of accelerant or remains do not match claimed property; physical damage to insured’s car is inconsistent with having being in a collision; etc.

  • Information on life application is vague, ambiguous as to details of health, history, dates, places of treatment, names of physicians / hospitals, or specific diagnosis.

  • Application not signed or pertinent questions not answered such as income, other insurance carried, hazardous duties, or aviation or flying activity, etc.

  • Insured has “excess” insurance at the time of insurance or earned income does not warrant amount of insurance being applied for.

  • Signature at the date of the application, differs from the signature at the date of the claim.

Red flags of insurance fraud contd3

  • Patient’s records missing from hospital or doctor’s office.

  • Pressure for speed of handling – claimant wants to stop by the office to pick up his cheque “as we’re leaving for vacation in the morning.”

  • Series of prescription numbers from the same drugs store don’t coincide chronologically with the dates of the prescriptions.

  • Preliminary information for a business fire loss or home fire loss indicates considerable financial difficulties and financial pressures being brought upon the owner and the fire is suspicious in nature and / or origin.

  • Burglary loss claim investigator observes that the remaining contents of the scene are of inferior quality than the alleged stolen ones, there is no indentation in the carpet where heavy items of furniture or equipment were allegedly placed, no hooks or nails in walls that allegedly hung valuable pictures, and / or entrances or exits too small to take large items through without laboriously disassembling it.

Guidance to help prevent and deter fraud protecting assets
Guidance to Help Prevent and Deter Fraud - Protecting Assets Protection”

  • Creating A Culture of Honesty and High Integrity.

  • Evaluating Anti-Fraud Processes and Controls.

  • Developing an Appropriate Oversight Process

  • Documentation

Creating a culture of honesty and high ethics

- Setting the Tone at the Top

- Creating a Positive Workplace Environment

- Hiring and Promoting Appropriate


- Training

- Confirmation

- Discipline

Creating a culture of honesty and high ethics1

Setting the Tone at the Top

  • Directors and officers of corporations set the “tone at the top” for ethical behavior within any organization.

  • Research in moral development strongly suggests that honesty can best be reinforced when a proper example is set—sometimes referred to as the tone at the top.

  • The management of an entity cannot act one way and expect others in the entity to behave differently.

  • It is always necessary for management to both behave ethically and openly communicate its expectations for ethical behavior because most employees are not in a position to observe management’s actions.

Creating a culture of honesty and high ethics2

Setting the Tone at the Top

  • Management must show employees through its words and actions that dishonest or unethical behavior will not be tolerated, even if the result of the action benefits the entity.

  • It should be evident that all employees will be treated equally, regardless of their position.

    For example, statements by management regarding the absolute

    need to meet operating and financial targets can create undue

    pressures that may lead employees to commit fraud to achieve them.

    Setting unachievable goals for employees can give them two

    unattractive choices: fail or cheat. In contrast, a statement from

    management that says,

Creating a culture of honesty and high ethics3

Setting the Tone at the Top

“We are aggressive in pursuing our targets, while requiring truthful financial

reporting at all times,” clearly indicates to employees that integrity is a

requirement. This message also conveys that the entity has “zero tolerance”

for unethical behavior.

  • The cornerstone of an effective antifraud environment is a culture with a strong value system founded on integrity.

  • This value system often is reflected in a code of conduct.

  • The code of conduct should reflect the core values of the entity and guide employees in making appropriate decisions during their workday.

  • The code of conduct might include such topics as ethics, confidentiality, conflicts of interest, intellectual property, sexual harassment, and fraud.

Creating a culture of honesty and high ethics4

Setting the Tone at the Top

  • For a code of conduct to be effective, it should be communicated to all personnel in an understandable fashion.

  • It also should be developed in a participatory and positive manner that will result in both management and employees taking ownership of its content.

  • The code of conduct should be included in an employee handbook or policy manual, or in some other formal document or location – the intranet so it can be referred to when needed

Creating a culture of honesty and high ethics5

Creating a Positive Workplace Environment

  • Research results indicate that wrongdoing occurs less frequently when employees have positive feelings about an entity than when they feel abused, threatened, or ignored.

  • Without a positive workplace environment, there are more opportunities for poor employee morale, which can affect an employee’s attitude about committing fraud against an entity.

    Factors that detract from a positive work environment and may increase the

    risk of fraud include:

  • Top management that does not seem to care about or reward appropriate behavior

  • Negative feedback and lack of recognition for job performance

  • Perceived inequities in the organization

  • Autocratic rather than participative management

Creating a culture of honesty and high ethics6

Creating a Positive Workplace Environment

  • Low organizational loyalty or feelings of ownership

  • Unreasonable budget expectations or other financial targets

  • Fear of delivering “bad news” to supervisors and/or management

  • Less-than-competitive compensation

  • Poor training and promotion opportunities

  • Lack of clear organizational responsibilities

  • Poor communication practices or methods within the organization

    The human resources department often is instrumental in helping to

    build a corporate culture and a positive work environment. Human

    resource professionals are responsible for implementing specific

    programs and initiatives, consistent with management’s strategies that

    can help to mitigate many of the detractors mentioned above.

Creating a culture of honesty and high ethics7

Creating a Positive Workplace Environment

Mitigating factors that help create a positive work environment and reduce the risk of

fraud may include:

  • Recognition and reward systems that are in tandem with goals and results

  • Equal employment opportunities

  • Team-oriented, collaborative decision-making policies

  • Professionally administered compensation programs

  • Professionally administered training programs and an organizational priority of career development

    Employees should be empowered to help create a positive workplace

    environment and support the entity’s values and code of conduct. They should

    be given the opportunity to provide input to the development and updating of

    the entity’s code of conduct, to ensure that it is relevant, clear, and fair.

    Involving employees in this fashion also may effectively contribute to the

    oversight of the entity’s code of conduct and an environment of ethical


Creating a culture of honesty and high ethics8

Creating a Positive Workplace Environment

  • Employees should be given the means to obtain advice internally before making decisions that appear to have significant legal or ethical implications. They should also be encouraged and given the means to communicate concerns, anonymously if preferred, about potential violations of the entity’s code of conduct, without fear of retribution.

  • Many organizations have implemented a process for employees to report on a confidential basis any actual or suspected wrongdoing, or potential violations of the code of conduct or ethics policy.

    Some examples - a telephone “hotline” that is directed to or monitored by an ethics officer, fraud officer, general counsel, internal audit director, or another trusted individual responsible for investigating and reporting incidents of fraud or illegal acts.

Creating a culture of honesty and high ethics9

Hiring and Promoting Appropriate Employees

Each employee has a unique set of values and personal code of ethics. When faced with

sufficient pressure and a perceived opportunity, some employees will behave dishonestly

rather than face the negative consequences of honest behavior. If an entity is to be

successful in preventing fraud, it must have effective policies that minimize the chance of

hiring or promoting individuals with low levels of honesty, especially for positions of trust.

Proactive hiring and promotion procedures may include:

  • Conducting background investigations on individuals being considered for employment or for promotion to a position of trust

  • Thoroughly checking a candidate’s education, employment history, and personal references

  • Periodic training of all employees about the entity’s values and code of conduct

  • Incorporating into regular performance reviews an evaluation of how each individual has contributed to creating an appropriate workplace environment in line with the entity’s values and code of conduct.

  • Continuous objective evaluation of compliance with the entity’s values and code of conduct, with violations being addressed immediately.

Creating a culture of honesty and high ethics10


  • New employees should be trained at the time of hiring about the entity’s values and its code of conduct. This training should explicitly cover expectations of all employees regarding:

  • their duty to communicate certain matters;

  • a list of the types of matters, including actual or suspected fraud, to be communicated along with specific examples; and

  • information on how to communicate those matters.

  • There also should be an affirmation from senior management regarding employee expectations and communication responsibilities. Such training should include an element of “fraud awareness,” the tone of which should be positive but nonetheless stress that fraud can be costly (and detrimental in other ways) to the entity and its employees.

  • In addition to training at the time of hiring, employees should receive refresher training periodically thereafter. Ongoing training for certain positions, maybe considered for purchasing agents or employees with financial reporting responsibilities. Training should be specific to an employee’s level within the organization, geographic location, and assigned responsibilities. For example, training for senior manager level personnel would normally be different from that of non-supervisory employees, and training for purchasing agents would be different from that of sales representatives.

Creating a culture of honesty and high ethics11


  • Management needs to clearly articulate that all employees will be held accountable to act within the entity’s code of conduct. All employees within senior management and the finance function, as well as other employees in areas that might be exposed to unethical behavior (for example, procurement, sales and marketing) should be required to sign a code of conduct statement annually, at a minimum.

  • Requiring periodic confirmation by employees of their responsibilities will not only reinforce the policy but may also deter individuals from committing fraud and other violations and might identify problems before they become significant.

  • Such confirmation may include statements that the individual understands the entity's expectations, has complied with the code of conduct, and is not aware of any violations of the code of conduct other than those the individual lists in his or her response.

  • Although people with low integrity may not hesitate to sign a false confirmation, most people will want to avoid making a false statement in writing. Honest individuals are more likely to return their confirmations and to disclose what they know (including any conflicts of interest or other personal exceptions to the code of conduct). Thorough follow-up by internal auditors or others regarding non-replies may uncover significant issues.

Creating a culture of honesty and high ethics12


The way an entity reacts to incidents of alleged or suspected fraud will send a

strong deterrent message throughout the entity, helping to reduce the number

of future occurrences. The following actions should be taken in response to an

alleged incident of fraud:

  • A thorough investigation of the incident should be conducted.

  • Appropriate and consistent actions should be taken against violators.

  • Relevant controls should be assessed and improved.

  • Communication and training should occur to reinforce the entity’s values, code of conduct, and expectations.

    Expectations about the consequences of committing fraud must be clearly

    Communicated throughout the entity.

Creating a culture of honesty and high ethics13


For example, a strong statement from management that dishonest

actions will not be tolerated, and that violators may be terminated and

referred to the appropriate authorities, clearly establishes

consequences and can be a valuable deterrent to wrongdoing. If

wrongdoing occurs and an employee is disciplined, it can be helpful to

communicate that fact, on a no-name basis, in an employee newsletter

or other regular communication to employees. Seeing that other people

have been disciplined for wrongdoing can be an effective deterrent,

increasing the perceived likelihood of violators being caught and

punished. It also can demonstrate that the entity is committed to an

environment of high ethical standards and integrity.

Evaluating antifraud processes and controls

- Identifying and Measuring Fraud Risks

- Mitigating Fraud Risks

- Implementing and Monitoring Appropriate Internal Controls

Evaluating antifraud processes and controls1

Misappropriation of assets cannot occur without a

perceived opportunity to commit and conceal the

act. Organizations should be proactive in reducing

fraud opportunities by;

  • (1) Identifying and measuring fraud risks,

  • (2) Taking steps to mitigate identified risks, and

  • (3) Implementing and monitoring appropriate preventive and detective internal controls and other deterrent measures.

Evaluating antifraud processes and controls2

Identifying and Measuring Fraud Risks

  • Management has primary responsibility for establishing and monitoring all aspects of the entity’s fraud risk-assessment and prevention activities.

  • Fraud risks often are considered as part of an enterprise-wide risk management program, though they may be addressed separately.

  • The fraud risk-assessment process should consider the vulnerability of the entity to fraudulent activity and whether any of those exposures could result in a material loss to the organization.

  • In identifying fraud risks, consideration should be given to industry, and country-specific characteristics that influence the risk of fraud.

  • The nature and extent of management’s risk assessment activities should be commensurate with the size of the entity and complexity of its operations.

    For example, the risk assessment process is likely to be less formal and less

    structured in smaller entities.

Evaluating antifraud processes and controls3

Identifying and Measuring Fraud Risks

However, management should recognize that fraud can

occur in organizations of any size or type, and that

almost any employee may be capable of committing

fraud given the right set of circumstances.

Accordingly, management should develop a heightened

“fraud awareness” and an appropriate fraud risk-

management program, with oversight from the board of

directors or audit committee.

Evaluating antifraud processes and controls4

Mitigating Fraud Risks

  • It may be possible to reduce or eliminate certain fraud risks by making changes to the entity’s activities and processes.

  • An entity may choose to sell certain segments of its operations, cease doing business in certain locations, or reorganize its business processes to eliminate unacceptable risks.

  • For example, the risk of misappropriation of funds may be reduced by implementing a central lockbox at a bank to receive payments instead of receiving money at the entity’s various locations. The risk of corruption may be reduced by closely monitoring the entity’s procurement process.

Evaluating antifraud processes and controls5

Implementing and Monitoring Appropriate Internal Controls

  • Some risks are inherent in the environment of the entity, but most can be addressed with an appropriate system of internal control.

  • Once fraud risk assessment has taken place, the entity can identify the processes, controls, and other procedures that are needed to mitigate the identified risks.

  • Effective internal control will include a well-developed control environment, an effective and secure information system, and appropriate control and monitoring activities.

  • Because of the importance of information technology in supporting operations and the processing of transactions, management also needs to implement and maintain appropriate controls, whether automated or manual, over computer-generated information.

  • In particular, management should evaluate whether appropriate internal controls have been implemented in any areas management has identified as posing a higher risk of fraudulent activity.

Developing an appropriate oversight process

- Audit Committee or Board of Directors

- Management

- Internal Auditors

- Independent Auditors

- Certified Fraud Examiners

Developing an appropriate oversight process1

To effectively prevent or deter fraud, an entity should have an appropriate oversight function in place. Oversight can take many forms and can be performed by many within and outside the entity, under the overall oversight of the audit committee of the board of directors.

Developing an appropriate oversight process2

Audit Committee or Board of Directors

  • The audit committee should evaluate management’s identification of fraud risks, implementation of antifraud measures, and creation of the appropriate “tone at the top.”

  • Active oversight by the audit committee can help to re-inforce management’s commitment to creating a culture with “zero tolerance” for fraud. The audit committee typically has the ability and authority to investigate any alleged or suspected wrongdoing brought to its attention.

  • Most audit committee charters empower the committee to investigate any matters within the scope of its responsibilities, and to retain legal, accounting, and other professional advisers as needed to advise the committee and assist in its investigation.

Developing an appropriate oversight process3


  • Management is responsible for overseeing the activities carried out by employees, and typically does so by implementing and monitoring processes and controls, as mentioned earlier.

  • However, management also may initiate, participate in, or direct the commission and concealment of a fraudulent act. Accordingly, the audit committee has the responsibility to oversee the activities of senior management

Developing an appropriate oversight process4

Internal Auditors

  • An effective internal audit team can be extremely helpful in performing aspects of the oversight function. Their knowledge about the entity may enable them to identify indicators that suggest fraud has been committed.

  • Internal audits can be both a detection and a deterrence measure. Internal auditors can assist in the deterrence of fraud by examining and evaluating the adequacy and the effectiveness of the system of internal control, commensurate with the extent of the potential exposure or risk in the various segments of the organization's operations.

  • Internal auditors may conduct proactive auditing to search for corruption and misappropriation of assets.

Developing an appropriate oversight process5

Independent Auditors

  • Independent auditors can assist management and the board of directors (or audit committee) by providing an assessment of the entity’s process for identifying, assessing, and responding to the risks of fraud.

  • The board of directors (or audit committee) should have an open and candid dialogue with the independent auditors regarding management’s risk assessment process and the system of internal control.

  • Such a dialogue should include a discussion of the entity’s exposure to misappropriation of assets.

Developing an appropriate oversight process6

Certified Fraud Examiners

  • Certified fraud examiners may assist the audit committee and board of directors with aspects of the oversight process either directly or as part of a team of internal auditors or independent auditors.

  • Certified fraud examiners can provide extensive knowledge and experience about fraud that may not be available within an entity.

Documentation Protection”

- Written Fraud Policy

- Code of conduct

- Code of Ethics Statement

Who is responsible for the detection of fraud
Who is responsible for the Detection of Fraud? Protection”

Management is responsible for designing and

implementing systems and procedures for the prevention

and detection of fraud and, along with the board of

directors, for ensuring a culture and environment that

promotes honesty and ethical behavior.

What is fraud
Questions? Protection”Contact Information: Email: 1-876-355-2856 1-876-770-5537