This presentation explores management fraud which is an issue that all of us should be wary of. Recent happenings in which accounting schemes and Ponzi schemes have left many unhappy due to heavy financial losses are only indicative of how weighty management fraud is. In this presentation, management fraud will be defined. Once we are clear on what management fraud is, I will focus on indicators of fraud in an organization and then elaborately explain how the same vice can be avoided or prevented.
Fraud is described as an act of making a misrepresentation of facts with the intent of gaining an unfair advantage over another person or organization (Rezaee 2007, 13). Fraud is a vice that is entrenched in most organizations in the world. This has been attributed to the fact that most of these crimes go unpunished. A lot of assets and money has been drained from organizations making them close down and struggle economically for their survival and existence. To stamp out fraud from organizations, the management of whatsoever organization has to institute comprehensive methodologies and strategies. The methodologies and strategies should be in line with organizational objectives. They should further be supported by established guidelines that guarantee workplace sanity and integrity.
Management fraud has taken several practices in organizations over time. Accounting professionals have over time established fraudulent and irregular ways of accounting. These irregular ways are sometimes infused into the accounting standards applied across the board in industries and economies (Graham 2007, 56). They fraudulently alter, omit transactions and other useful information regarding financial recording and reporting to form a false image of a company’s financial worth whereas taking advantage of unsuspecting investors. Accounting fraud is done in a variety of ways e.g. intentional overstating of revenues and inappropriately reporting financial disclosures (Rezaee 2007, 163). Unsystematic differences in inventory counts and costs of goods being sold related transactions do not agree. An internal weakness within the organization further perpetrates fraudulent activities. Long tenure employee in the organization knows and understands the structure of the organization and loopholes (Wells 1992, 135). Such employees, in absence of proper checks, can easily take advantage of inherent loopholes to defraud the organization. Analytical symptoms in inconsistent financial documents and other financial-related information can be an indicator of fraud in the organization (Rezaee 2007, 132). Inconsistency in financial accounting principles and lack of interrelationship between nonfinancial statements can point to something cunning going on in the company. For instance, when the sales are high a reserve may be too low (Coenen 2009, 80). Analyzing every financial record keenly and professionally can reveal if a fraud has been done and appropriate mechanism took. Behavioral changes within an organization can point to what is happening. If there is a restriction on access to facilities, financial records, or customer’s information where important financial evidence has to be extracted by employees or management concerned, then this can mean that fraud is taking place (Coenen 2009, 73). This can be further evidenced by delays in providing requested inventory-related information, inconsistency, vague or mixed responses from the management or employees of the evidence being sought after. There might be suspicious behavior among the management team when asked about the cost of goods sold related to transaction vendors’ accounts (Goldmann 2009, 48).
Tips and complaint symptoms should be accommodated as a way of monitoring what is talking taking an organization. However, precaution should be exercised because some tips and complaints can not be justified, it’s sometimes difficult to differentiate the motivation of the person giving a complaint or the tip. Tips and complaints should be treated with caution and care should be taken more keenly to ascertain the claim clear and elaborate investigation has to be exercised to qualify the tip or complaint (Coenen 2009, 11).
For prosperity to be realized in an organization, an elaborate and efficient fraud prevention mechanism has to be structured and affected. This will facilitate the organization to achieve its financial objectives and corporate goals without much strain. A number of mechanisms have to be employed for its facilitation. One such mechanism is strong controls. The company should have standard and comprehensive controls to check on its financial operations. This will not only reduce the risk of management fraud but as enhance the organization’s integrity (Rezaee 2007, 237). A clear policy indicating how financial transactions are processed should be established and strengthened; this will reduce the chances of fraud (Rezaee 2007, 238). Good controls designed should aim at reducing the risk of a specific fraud, which is a major problem to an organization (Graham 2007, 211). Prior to rolling it, Risk analysis should be carried out to establish which control is better situated to curb it and its effectiveness within the organization because different controls can work for some organizations but not others (Graham 2007, 213). This will allow room for modification to its programs if need be to prevent, guard and detect in advance the violation.
New employees should be thoroughly screened to ascertain that they are morally upright before a job offer is granted to them. Educational credentials, employment history, references and criminal records should be scrutinized. This is important because the organization can come out with valuable information regarding the person’s trustworthiness, moral conduct, and loyalty.
Fraud Training should be emphasized to all employees. This should spell out clear responsibilities on how to report the misconduct in the organization (Graham 2007, 139). The training should be a place to communicate and reinforce the ethics of the organization and the desired expectations. The training should further elaborate on the kinds of acts that could lead to criminal conduct and prosecution within a legal framework (Tipton 2006, 267). Work Ethics, integrity, and moral standards should be a virtue at the workplace; everyone should lead by example (Tipton 2006, 267). The management has to communicate with employees what they expect and provide a conducive environment mechanism for reporting fraud (Rezaee 2007, 49).A rewarad scheme should be introduced to reward those who adhere to the code of ethics of the company (Rezaee 2007, 51). This will improve the motivation of other employees and shy away from Fraud involvement activities (Tipton 2006, 269).
A concise and clear code of conduct should be established within the organization’s standards and be made available to every employee to willingly read and sign so that they can adhere to it. Regular audits should be carried out randomly and unannounced to determine new vulnerabilities and assess what is happening in the organization (Goldmann 2009, 143). This is important because it will measure the existing controls which are in place and employees will realize that fraud prevention in the organization is a priority (Goldmann 2009, 143).
A confidential but anonymous fraud reporting mechanism should be established (O’Gara 2004, 12). This should be carried out for employees, vendors, and customers to effectively report to the management the violation of policies of the organization (O’Gara 2004, 13). Advertisements can be placed in organizations strategic places with hotlines numbers to facilitate employees and management to confidently call and report any case of suspicious fraudulent activities at the workplace (Tipton 2006, 290). All parties should be encouraged and motivated to use the system at all times. Senior Management have to lead by example in their actions and ethics for all organization employees to emulate, their attitude towards each other should be cordial and the rules and regulations of their attitude will have to be reflected in their attitude towards their employees, regardless of the post in an organization, every employee should be held accountable for his/her actions (Spencer 2007, 287).
Division of duties within an organization should be a requisite, different employees should be assigned different job responsibilities this will enhance efficiency and accountability i.e. in the accounts department, no single employee will be responsible for both recording and processing a transaction. This will reduce the incidences of fraud (Goldmann 2009, 200). Accessibility to financial information should be controlled only the authorized personnel should be given physical access to financial assets and accounting systems this will prevent chances of fraud occurring (Graham 2007, 301).
In conclusion, management fraud can paralyze the productivity of the organization and make it not realize its initial objectives and its vision. Comprehension mechanisms to detect, analyze, prevent and respond to it when done in advance within the organization framework will give early signal warning and appropriate measures taken before the actual fraud occur.
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Tipton F. H. (2006). Information Security Management Handbook. Vol 3. New York: CRC Press.
Wells, T. J. (1992) Fraud Examination: Investigative and Audit Procedures. Minnesota: Quorum Books.