Fraud deterrence

Fraud deterrence has gained public recognition and spotlight since the 2002 inception of the Sarbanes-Oxley Act. Of the many reforms enacted through Sarbanes-Oxley, one major goal was to regain public confidence in the reliability of financial markets in the wake of corporate scandals such as Enron, WorldCom and Waste Management. Section 404 of Sarbanes Oxley mandated that public companies have an independent Audit of internal controls over financial reporting. In essence, the intent of the U.S. Congress in passing the Sarbanes Oxley Act was attempting to proactively deter financial misrepresentation (Fraud) in order to ensure more accurate financial reporting to increase investor confidence. This same concept is applied in the discussion of fraud deterrence. Until recently, fraud deterrence has not been specifically identified under one common definition. While it has been discussed by many authoritative sources such as the American Institute of Certified Public Accountants (AICPA) Practice Aid Series, "Fraud Detection in a GAAS Audit: SAS No.…

Fraud deterrence has gained public recognition and spotlight since the 2002 inception of the Sarbanes-Oxley Act. Of the many reforms enacted through Sarbanes-Oxley, one major goal was to regain public confidence in the reliability of financial markets in the wake of corporate scandals such as Enron, WorldCom and Waste Management. Section 404 of Sarbanes Oxley mandated that public companies have an independent Audit of internal controls over financial reporting. In essence, the intent of the U.S. Congress in passing the Sarbanes Oxley Act was attempting to proactively deter financial misrepresentation (Fraud) in order to ensure more accurate financial reporting to increase investor confidence. This same concept is applied in the discussion of fraud deterrence. Until recently, fraud deterrence has not been specifically identified under one common definition. While it has been discussed by many authoritative sources such as the American Institute of Certified Public Accountants (AICPA) Practice Aid Series, "Fraud Detection in a GAAS Audit: SAS No. 99 Implementation Guide," (explicitly) The Committee of Sponsoring Organizations of the Treadway Commission (COSO), "Internal Control – Integrated Framework," (implicitly) and the National Association of Certified Valuation Analysts Certified Fraud Deterrence Analyst (CFD) designation (recently merged into the Certified Forensic Financial Analyst (CFFA) designation), an actual definition of the term "fraud deterrence" has been difficult to find. Working Out = Remediation A person has already gained weight Lessen the amount of weight gain by working out immediately after noticed gain The longer the weight gain goes unnoticed, the more overweight they will become Scale = Early Detection Scale is used to detect weight gain, before it is visibly noticeable Detects nothing unless weight is increasing When the scale reads a higher number, the weight has already been gained Removal of Causal Factors = Deterrence Removal of unhealthy food in diet Removal of habits that perpetuate obesity (e.g. inactivity) Increasing awareness of obesity risks (e.g. health classes in primary education) ===1. Control Environment=== The Control environment consists of the actions, policies, and procedures that reflect the overall attitudes of top management, directors and owners of an entity about internal control and its importance to the entity." Some subcomponents of the Control environment include: integrity and ethical values; commitment to competence; board of directors or Audit committee participation; management’s philosophy and operating style; organizational structure; assignment of authority and responsibility; and human resource policies and practices (Arens, Elder, Beasley, Auditing and Assurance Services). ===2. Risk Assessment=== "Risk Assessment is a forward looking survey of the business environment to identify anything that could prevent the accomplishment of organizational objectives. As it relates to fraud deterrence, risk assessment involves the identification of internal and external means that could potentially defeat the organization’s internal control structure, compromise an asset, and conceal the actions from management. Risk assessment is a creative process; it involves identifying as many potential threats as possible, and evaluating them in a way to determine which require action, and the priority for that action" (Cendrowski, Martin, Petro, The Handbook of Fraud Deterrence). ===3. Control Activities=== "Policies and procedures, in addition to those included in the other four components, that help ensure that necessary actions are taken to address risks in the achievement of the entity’s objectives" (Arens, Elder, Beasley, Auditing and Assurance Services). "Control procedures are also a prime focus area for fraud deterrence engagements; if control procedures are not adequately defined and consistently enforced within the organization, the opportunity for fraud is introduced" (Cendrowski, Martin, Petro, The Handbook of Fraud Deterrence). "For asset protection, this typically involves identifying assets within the organization that would be susceptible to fraud, and defining control procedures such that the assets cannot be removed and the removal concealed. Fraud deterrence involves proactively examining these control procedures to verify they are adequately designed and actually functioning within the organization" (Cendrowski, Martin, Petro, The Handbook of Fraud Deterrence). Control activities generally fall into the five following specific control activities: 1) adequate separation of duties; 2) proper authorization of transactions and activities; 3) adequate documents and records; 4) physical control over assets and records; and 5) independent checks on performance (Arens, Elder, Beasley, Auditing and Assurance Services). ===4. Information & Communication=== "Information and Communication relates to the flow of information in two directions within the organization. First, information should flow downward to the line functions and provide the best, most accurate information as needed to allow the function to produce the best results possible. Second, information about performance should flow upwards through management, through both formal and informal communication channels, providing objective feedback. Both communication channels must function effectively to safeguard the organization" (Cendrowski, Martin, Petro, The Handbook of Fraud Deterrence). ===5. Monitoring=== "Monitoring activities deal with ongoing or periodic assessment of the quality of internal control performance by management to determine that controls are operating as intended and that they are modified as appropriate for changes in conditions" (Arens, Elder, Beasley, Auditing and Assurance Services). "Monitoring involves both fraud deterrence and fraud detection activities. First, management(what if some in the management are the perpetrators of fraud- JUDGE -MIDLANDS STATE UNIVERSITY) must ensure that all control processes are performed as designed and approved. Control compliance analysis to verify correct performance of procedures could reveal a control that has been inappropriately modified or one that is not performed as approved; this control weakness could present the opportunity for fraud. Proactively identifying these weaknesses and correcting the weakness is this is the fraud deterrence aspect of the monitoring process" (Cendrowski, Martin, Petro, The Handbook of Fraud Deterrence). ==Further reading== 2009 IT Audit Benchmarking Study (The Institute of Internal Auditors) ==References==

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