Fraudulent Activity Has Increased

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Source: The Institute of Internal Auditors

ALTAMONTE SPRINGS, Fla. — Fraudulent acts by employees and outsiders alike have risen since the onset of the 2008–2009 economic recession, and internal auditors predict that these criminal activities will continue unabated throughout 2010 despite increasing management deterrence efforts. Those are the principal findings of a new Knowledge Alert, Emerging Trends in Fraud Risks, from The Institute of Internal Auditors (IIA).

Not surprisingly, the almost 300 chief audit executives (CAEs) and other internal audit professionals working in organizations of varying sizes and industry groups surveyed by The IIA overwhelmingly believe that internal auditors can add value to their organization’s fraud risk management efforts through robust assurance and consulting activities, such as automated data mining and analysis.

“Throughout my career of more than 30 years as an internal auditor, I’ve seen several recessions come and go, and their impacts on organizations have followed predictable patterns,” says IIA President and CEO Richard Chambers, CIA, CGAP, CCSA. “The recessions we’ve experienced in the past, like the one we’re just emerging from, foster an environment that’s highly conducive to fraud schemes, and internal audit activities are in a perfect position to show their great value during these turbulent financial times,” he says.

More specifically, among the 31 percent of survey participants from organizations where instances of fraud were detected since 2008, 43 percent report that fraud occurrences increased from 1 percent to 10 percent, 28 percent indicate fraud increased from 11 percent to 20 percent, and 14 percent say fraud increased by more than 20 percent. Theft of company property and resources — including proprietary information — is the fastest-growing fraud reported by respondents followed by embezzlement, including expense-account fraud and third-party/vendor fraud.

“As an inspector general in the U.S. government, I learned a great deal about the motives and circumstances that lead to fraud. In general, the more financial duress that potential perpetrators are under, the more likely they will be to commit fraud,” observes Chambers.

To their credit — and to the benefit of their shareholders and customers — the majority of organizations represented in the survey (76 percent) have implemented a fraud risk management program, 34 percent formal and 42 percent informal in nature. These programs most commonly feature processes for detecting fraud and policies on and procedures for reporting suspected frauds.

Leading internal audit practices detailed in the 24-page Knowledge Alert for assisting the board and management discharge their responsibility for deterring fraud are:

·    IIncreasing fraud awareness, communication, and training throughout the organization.

·        Reviewing audit-specific financial activities.

·        Implementing a continuous audit process.

 and other programs within the organization.

·        Increasing fraud awareness, communication, and training at all levels of management.

·        Conducting or assisting in fraud investigations.

        Performing data mining and analysis.

The findings of the new Knowledge Alert are supported by other IIA surveys conducted during the last two years. For example, 51 percent of the 190 CAEs surveyed at the beginning of last year predicted that instances of fraud would increase in their organization during 2009. And the majority of Fortune 250 CAEs participating in a March 2009 IIA roundtable discussion reported that they had increased their focus on fraud, particularly in areas with high recession-related risks.

 In December 2009, The IIA released a 42-page Practice Guide, Internal Auditing and Fraud, to help internal auditors discharge their fraud-related professional obligations under The IIA’s International Standards for the Professional Practice of Internal Auditing. The Institute also published a 27-page Global Technology Audit Guide, Fraud Prevention and Detection in an Automated World, to provide internal audit professionals with an overview of IT-related fraud risks as well as techniques for effectively engaging technology to assess risks related to fraud. Both publications, which are considered “strongly recommended” guidance under The IIA’s International Professional Practices Framework, are available to IIA members as a free download at www.theiia.org/guidance/standards-and-guidance/ .

The IIA is internationally recognized as a trustworthy guidance-setting body. Serving members in 165 countries, The IIA is the internal audit profession's global voice, chief advocate, recognized authority, acknowledged leader, and principal educator.

·        Performing risk assessments and risk-based audits.

·        Increasing the level of coordination and cooperation with internal and external groups

·        Reviewing systems in place and their corresponding policies, procedures, and controls.

·        Performing regularly scheduled audits that monitor high-risk areas.

 

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