The Financial Executives International (FEI) unveiled their “Financial Reporting Fraud – Prevention Starts at the Top” article in conjunction with a Fraud Literacy Quiz in Accounting Today on November 14, 2011. The Fraud Literacy Quiz is available through their website and provides members and non-members with CPE credit, in conjunction with the article.
The article highlights the fraud triangle which was developed in 1953 by criminologist Donald Cressey. Key elements to the triangle include perceived pressure (such as the need to meet financial targets), an opportunity (poor checks and balances or weak systems), and the ability to rationalize the fraud. Since an ACFE study indicates that more than 85 percent of fraud cases included in the survey involved people who had never been charged or convicted of fraud, a board of directors should “acknowledge that ‘fraud can happen here’ regardless of the organization’s reputation and undertake an evaluation of the organization’s fraud risk management program.”
The article mentions many tools and processes to reduce the risk of fraud, including the right tone at the top, the board and audit committees interviewing executives and internal/external auditors, segregation of duties, background security checks and fraud awareness training.
The article also highlights the importance of having a hotline, indicating that more tips come in when an anonymous hotline is in place. Several studies have found that fraud was discovered through a tip more often than through any other means. Since the hotline should be anonymous and available 24 hours a day, seven days a week, it should be outsourced.
The FEI indicates that they are seeing an uptick in the number of companies outsourcing their fraud hotline. According to FEI President and CEO Marie Hollein, “We do see a number of our members that now have compliance groups and ethics groups in place and outsource that process to allow for anonymity”.