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The following actions/steps will help in controlling frauds:
1.Assessing the risk of frauds
2.Educate employees at regular intervals
3.Implement sound Cyber security measures
4.Educate bankers as well customers
5.Conduct fraud awareness work shops,at regular intervals, at various levels from employees,corporates,Banks , educational institutions and general public at regular intervals.
Fraud is defined as misrepresentation of a fact by the perpetrator of fraud knowing it to be false and the person “Victim” believing it to be true and acting on such belief and incurs monetary and financial losses while the fraud perpetrator gains at the cost of the “Victim”.
Fraud is nothing but “people”.
Fraud may be committed by anyone.
In several cases of fraud, the following characteristics are found in a person committing fraud:
2. Dominant leaders
3. Flamboyant and enterprising
4. Dishonest and Rouge Employees
5. Psychopathic Personalities.
What is Fraud Triangle?
As shown above, a fraud triangle has three components and this term is used in the context of an Employee Fraud, in an organization.
The fraud may take the shape of misappropriation of cash and assets of the organization.
What are the components of fraud triangle?
3. Rationalization / Attitude.
Now, in brief, let us examine the above three components of Fraud Triangle.
Firstly, Opportunity is a factor that a long serving employee will resort to in committing a fraud, taking advantage of his proximity to management and control over several operations of the organization.
Secondly, Pressures are another cause of fraud, mainly due to financials problems at home, family issue-, children education, health issues, and addiction to bad habits like gambling.
Thirdly, Rationalization or Attitude is the third component of the fraud triangle. Here the employee rationalizes and justifies for himself, his fraudulent activities as he misappropriates with an intention of repaying back the amounts, in due cource, which may, ofcource, never, happen.
It is reported that at least 30% of the frauds are attributable to the employees.
Main reasons for the occurrences of frauds relating to Fraud Triangle
Inadequate or poor Internal Control Systems:
One of the main causes for their occurrence of frauds as per fraud triangle are either poor or total lack of internal controls .Management may be busy with other personal activities or involved in other business interests, hence ,no monitoring on daily basis or simply placing pure trust on one or a few “trusted” employees.
Internal control measures are the most important set of policies for an organization with clear specification of duties, responsibilities and segregation of job responsibilities with different levels of reporting and accountability.
Internal audit mechanism is another effective method of reporting to the management on the systems and suggestions for improvement. However only large organizations can afford internal auditors.
· Educating the employees on the pros and cons of frauds .The consequences of committing frauds.
· Encouraging Whistleblower policy of reporting any suspicious activity in the organization to higher management or statutory authorities and police.
· Installing division of duties, strict internal control mechanisms and clear cut organization structure with control points.
· Screening of the employees thoroughly and use of psychometric tests to know the behavioral aspects and nature of an employee.
The Fraud Triangle can be best explained by the following illustration:
The case relates to a medium sized trading company, “ABC Co. Limited “ with over 100 employees in different divisions. There is one senior Accounts Payable Manager, Kiran, working with the company since the inception of the company for over ten years.
Kiran being a senior manager and a long standing employee with the company has access to opening new vendor accounts bypassing General Manager’s approval. Also Kiran can easily access the signature stamp of the general manager, as it is not kept in safe custody.
Kiran though a good person has a compulsive pathological gambling problem. This problem created an unshakable financial burden on him. As he has control over opening new vendor accounts, he opened a “XYZ Co. Limited” and started payments to the vendor, into his wife’s account, against remittances on fictitious invoices raised by XYZ Company with all relevant documentation in order though, no goods took place. The general manager’s signature was forged and his authorized stamp was misused. This was going on for 3-4 years when the statutory auditors, found huge outstanding amounts against the XYZ Company limited. When brought to the notice of the management, it was found that the vendor never existed, nor any goods received by the company.The funds received against fictitious invoices were always diverted to his wife’s account. Thus the fraud was being perpetrated from 2010-2014, with the company having an operational budget of about Rs.5 crores per annum.Thus several lakhs of rupees was misappropriated by Kiran, till the fraud was discovered.
Thus, the above example illustrates how a fraud triangle works and the reasons behind such fraudulent activity.
The main reasons for misappropriation by fraudulent means by Kiran are:
1 Lack of internal controls which gave scope for creating fictitious vendor.
2. Lack of segregation of duties, as being an old employee, Kiran was given multiple tasks and control and was fully trusted.
3. Easy access of higher authority signature and stamp, which the general manager ought to have kept under lock and key and in his absence should be used by a designated person and made accountable.
4. The extent of blame on external auditors depends on the materiality aspect of the fraud committed, at the time of discovery of fraud, whereas the fraud was being perpetrated past 3 years, prior to discovery and it is the primarily management’s responsibility to put internal controls system in the organization.
Hence COSO-COMMITTEE OF SPONSORED ORGANISATIONS OF THE TREADWAY COMMISSION- Has laid out five areas of integrated internal controls Framework: The auditors should test all the COSO components and their effectiveness.
1. Control Environment-Main component to establish controls down the line
2. Risk Assessment
3. Control Activities
4. Monitoring activities
5. Information and communications
Thus Kiran perpetrated the fraud as defined in Fraud Triangle:
1. Firstly, Pressure-his Unshakable financial burden; due to gambling habits.
2. Secondly, Opportunity to misappropriate as a result of poor internal controls in place.
3. Thirdly, Rationalization-This may or may not exist, in the current scenario, as it depends upon Kiran’s intention of replacing the misappropriated cash. If he had the intention then it is his rationale that he can put back the misappropriated cash.
As quoted by a famous philosopher ‘Rather fail with honor than succeed by fraud’- it is vital to ensure the implementation of the preventive measures discussed above to mitigate corporate fraud.
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