What Are The Situations That Can Increases The Chance Of Fraud Occurrence

In a survey undertaken by Ernst and Young they found that 75% of the sample of 1,200 companies world-wide were victims of fraud during the last 5 years. Of the worst fraud over 80% was committed by staff over 75% of whom had been with the company for more than 5 years.

The study also discovered that 25% of businesses lost over $1m through fraud in the last 5 years and that more than half of the frauds discovered were discovered by chance.

Understanding circumstances where Risk of fraud is higher than usual:

Management must have an understanding of how and why fraud occurs in order that internal controls can be properly designed and operated.

The risk of fraud can arise in certain circumstances or due to certain factors, some of which are as follows:

• Understand HIGH-RISK AREA:

like Cash sales which are tempting particular where internal controls are underemphasized.

• CHANGES IN CIRCUMSTANCES like computerization:

increases the risk for fraud, for example changes in the management information system, in particular increased computerisation. Computer fraud is rapidly increasing in frequency and sophistication and presents a real danger for many organisations;

• ORGANISATIONAL CHANGES:

can also present very welcome opportunities for fraudsters, particularly during transition phases or following downsizing when key controls such as segregation of duties may be compromised;

• RAPID GROWTH

Fraud can also occur during periods of rapid growth in the volume of activity when there may be inadequate time for proper verification of all transactions. Most organisations expand first and try to put the controls in place later;

• INDUSTRY SPECIFIC:

The risk of fraud may also be increased by factors which are specific to the industry, for example extensive travel and related expenses or very high levels of corporate entertainment;

• PERSONNEL FACTORS

may also have a significant influence where a dominant manager is either given or exercises extensive authority;

• INADEQUATE SUPERVISION

·     Lack of emphasis on compliance with internal controls will eventually invite fraud;

• INADEQUATE SCREENING OF NEW EMPLOYEES

Includes no proper follow up on interviewing re: gaps in curriculum vitas

• STAFF BEHAVIOUR CHANGES

This include unexplained changes in living standards (driving very expensive cars, ornaments, etc), staff not taking holidays, working unsociable hours, turning down promotions, resigning unexpectedly ,etc)

• STAFF ARE BEING UNDERPAID AND MORALE IS LOW

this can also create an environment where fraud may be perpetrated.