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Fraud ER: Do you have a plan for corporate fraud?

01/05/2008


Having disaster insurance and an evacuation plan in case of fire is standard in today’s workplace. But how many of us have a plan for dealing with a threat that can be just as devastating - corporate fraud?

According to a recent survey, 55 per cent of Canadian businesses have experienced economic crime. Corporate losses due to fraud are estimated to be six per cent of a company’s total revenues.

MNP forensic services leader Greg Draper says fraud is more prevalent than we think - and when it does strike, its impact is felt on every level. “Fraud can obviously be a major blow to an organization financially, but the effects on other areas, like reputation and staff morale, can be just as devastating.”

Developing a fraud response plan is an ideal way to help reduce that risk. A plan is particularly valuable to organizations that could suffer extensive damage due to fraud or ethical violations. These organizations can range from public companies that need to report to shareholders to health districts that receive government funding and must account for their spending.

Greg advises that having a fraud response plan in place early can help reduce the risk of fraud, minimize losses if it does occur, and reduce your organization’s liability insurance.

“It’s really a win-win for everyone involved, plus it’s a great cost-savings for your business.”

Building Your Team

Ensuring you have the right people on your team can have a major impact on your plan’s effectiveness. “If you’re planning a fire drill, you want a reliable fire warden on every floor to keep everything on track. The same is true when it comes to developing a fraud response plan,” explains Greg.

Your team should be made up of subject matter experts from all key areas of your organization; each will play a critical role in executing your plan.

Key Team Players

Project Leader

 - Manages the response plan and coordinates the internal team.
 - Reports to the audit committee and your board of directors.
 - Usually a representative from your internal audit department.

Human Resources

- Provides information on union agreements and employment contracts.
- Manages risk related to suspending and terminating employees.
- Liaises with labour lawyers and unions.

Finance

- Provides financial information to investigate potential fraud cases.
- Helps explain the flow of information and shares information on internal controls.

IT

- Provides details on IT controls and access.
- Facilitates access to computers for forensic analysis.
- Compiles data from the server.

Legal (internal)

-Advises management on key issues such as privacy, corporate governance, and director and officer liability.
-Coordinates disclosure related to investors, regulators, and media.

Legal (external)

- Assists with litigation.
- Ensures solicitor-client privilege.

Forensic Accountants

- Provide specialized expertise on suspected/confirmed fraud cases.
- Ensure independence.


Four Steps to Combating Fraud

Once your fraud response team is in place, you can start implementing your plan based on these four steps:

1. Prevention. Most fraud response plans focus on investigating a suspected wrongdoing. Yet taking action to help prevent fraud is just as important. That’s because preventive measures send a strong message to both your staff and external stakeholders that your business recognizes fraud is a potential risk and is prepared to address it.

“A great way to help reduce your risk of fraud is to ensure you’ve written your fraud response plan into your organization’s policies, or at least referenced it,” asserts Greg.

He urges organizations to inform employees and other key stakeholders they have a plan in place - and will use it whenever fraud or some other ethical violation is suspected or verified. Be sure to review your plan annually to help keep it current.

2. Detection. While preventive action can help reduce your risk, it can’t eliminate it. Implementing an ongoing fraud detection program is crucial to identifying issues early and minimizing losses. Given that 17 per cent of fraud is uncovered by accident, conducting targeted audit testing is crucial.

Establishing a whistleblower hotline is another strategy to help reduce the risk of fraud or detect a potential problem as early as possible. Tips are by far the most common detection method. Ideally, the hotline should be active 24 hours a day, 365 days a year, and be operated by a third party to ensure objectivity. Hotlines are very effective, and have been proven to reduce fraud losses by 50 per cent.

3. Investigation. If your organization suspects fraud has occurred, assess the information you have as quickly as possible.

“Start by identifying which members of your response team need to be involved, and have each one collect whatever relevant information they can find,” advises Greg. If the evidence points toward fraud, you’ll need to investigate further.

Given the seriousness of fraud, any investigation you do must be professional – and be viewed as such by your staff, shareholders, and other key stakeholders.

Ensuring you have external lawyers, forensic accountants, and other objective third parties involved is critical. The investigation should also be conducted as promptly as possible to reduce the risk of information becoming lost or hidden.

4. Remediation. If your investigation has confirmed a case of fraud, you may be able to recover some of your losses as well as costs to your organization.

“It’s important to remember there are steps you can take to recover at least some of the damages,” says Greg.

These options include litigation, asset tracing, and insurance claims. Greg urges organizations to ensure they have sound legal advice to determine which option is best for them.

Remediation should also involve addressing the circumstances, such as gaps in your internal controls, which contributed to the fraud. This helps strengthen your preventive steps for the future.

While fraud is an ongoing threat to every organization, developing an effective response plan is one of the best ways you can help reduce that risk – and minimize the damages if it does strike.

For more information on developing a fraud response plan, please contact Greg Draper, Investigative and Forensic Services Leader at 1.877.500.0792 or your local MNP advisor.