1. Fraud Examination, 3E Chapter 4: Preventing Fraud
COPYRIGHT © 2009 South-Western, a part of Cengage Learning

2. Learning Objectives
Understand how to create a culture of honesty, openness, and assistance
Know how to eliminate opportunities for fraud
Understand how to set up an organization to effectively minimize fraud

3. Organizational Culture
Way to Create a Culture of Honesty, Openness, and Assistance
How This Step Is Accomplished
Hire honest people and provide fraud awareness training.
1. Verify all information on the applicant’s résumé and application.
2. Require all applicants to affirm the truth of the matters set forth in their application and résumé.
3. Train management to conduct thorough and skillful interviews.
Create a positive work environment.
1. Create expectations about honesty by having a good corporate code of conduct and conveying those expectations throughout the organization.
2. Have open-door or easy access policies.
3. Have positive personnel and operating procedures.
Provide an employee assistance program (EAP).
1. Implement an EAP that helps employees deal with personal and nonsharable pressures in their lives.

4. Eliminate Opportunities for Fraud
Five ways to eliminate fraud opportunities:
Have good internal controls
Discourage collusion
Monitor employees and provide a whistle-blowing system
Create an expectation of punishment and
Conduct proactive auditing

5. Internal Controls Implement Assess Risks Controls
Segregation of Duties
Authorizations
Assess Risks
Implement
Controls
Physical Controls
Independent Checks
Documentation

6. Whistle-blower System
Effective systems have the following:
Anonymity
Independence
Accessibility
Follow-up

7. Proactive Fraud Auditing
Good fraud auditing involves four steps:
Identify fraud risk exposures
Identify the fraud symptoms of each exposure
Build audit programs to proactively look for symptoms and exposures
Investigate fraud symptoms identified

8. Preventing Fraud – A Summary
Create a culture of Honesty,
Openness, and Assistance
Eliminate Opportunities
Implement Employee Assistance Programs
Have good internal controls
Discourage Collusion
Have a Code of Ethics
Provide tip hotlines
Publicize company policies
Create a Positive Work Environment
Create an expectation of punishment
Proactively audit for fraud
Hire honest people and provide fraud awareness training
Monitor employees

9. Preventing Fraud – Current Model
Stage 1:
Fraud Incident
Stage 4:
Resolution
Stage 2:
Investigation
Stage 3:
Action

10. Preventing Fraud – Suggested Model
Tone at the Top
Investigation and Follow-up
Education and Training
Proactive Detection
Integrity Risk and Controls
Reporting and Monitoring