Step Up to the Fraud Prevention Challenge

Accounting and finance leaders, other senior executives, boards of directors, and auditors who communicate and collaborate can effectively fight the increasing threat of fraud. It’s essential to develop an organizational culture of fraud awareness and prevention because dysfunction in, or a lack of emphasis on, ethics is often a root cause of fraud incidents, misconduct, and scandals. In addition, leaders must adapt to the changing regulatory landscape, as they can expect increased scrutiny of—and accountability for—fraud from governmental agencies and other regulators as well as the public moving forward.

A Foundation for Fraud Prevention

Cases of fraud reported to Action Fraud, the U.K.’s national reporting center for fraud and financially motivated cybercrime, rose by one-third in 2020, according to an analysis by consumer rights group Which? Further, according to Fraud Is on the Rise: Step up to the Challenge—a research report based on a survey of senior internal auditors, risk professionals, and fraud experts from private, public, and third-sector entities by AuditBoard and the Chartered Institute of Internal Auditors (CIIA)—most participants of roundtable discussions agreed that there has been an increase of attempted fraud cases in their organizations.

“With fraud on the rise, organizations, including finance teams, must take a more proactive role in fighting fraud,” says Richard Chambers, senior internal audit advisor at AuditBoard and former CEO of the Institute of Internal Auditors (IIA). “There are increasing regulatory pressures for company directors to take greater responsibility for ensuring there are robust controls in place to prevent and detect fraud.

“This means working closely with internal audit to set up and conduct regular and thorough fraud risk assessments, clear fraud policies, and prepare for new rules and regulations on fraud,” he says. “Organizations should also play a more vital role in developing a strong fraud prevention culture.”

Accounting and finance leaders who make a point to discuss ethics with their team regularly provide a foundation for establishing and reinforcing an organization's ethical culture and fraud prevention strategies. The latter include developing a robust fraud risk assessment, conducting regular assessments, and initiating anti-fraud policies, processes, and controls.

“A root cause of almost every major fraud scandal is dysfunction in the organization’s corporate culture, so setting the right tone and nurturing a positive fraud culture across the organization is key and should start from the top with boards and senior management,” Chambers says. “Developing a positive fraud prevention and awareness culture means encouraging openness and transparency with employees so they feel comfortable raising concerns and with the appropriate channels to do so. 

“Individuals should set a strong tone against fraud and lead by example, especially at the top,” he says. “Individuals should also learn, understand, and adhere to anti-fraud policies and processes.”

Steps to Mitigate Workplace Fraud Risk

The onus of fraud risk policy and management is on senior management as the first line of defense and oversight. CFOs and upper management are instrumental in developing the right communications and supportive culture that encourage employees to choose the right path and say something if they see something. According to the Association of Certified Fraud Examiners (ACFE) 2020 Report to the Nations, a faulty tone at the top was the primary risk factor in 22% of all financial statement frauds.

Chambers recommends the following steps: introducing anti-fraud policies, processes, materials, and controls that protect people from temptation, coercion, and accusation, as well as discussing fraud-related issues openly and transparently with employees. He says that will help to increase awareness and eventually lead to better fraud prevention and detection. Additionally, accounting and finance leaders should stay approachable and available to discuss team members’ ethical questions and suspicions of potential fraud.

Internal auditors can play a supporting role in better managing and mitigating fraud risks. The internal auditor’s job is to ensure that the organization has conducted a thorough and up-to-date fraud risk assessment to find areas that may be exposed to fraud.

“It’s internal audit’s role to encourage managers to put sufficient and adequate controls in place to prevent and detect fraud, as well as to monitor how effective these controls are in practice,” Chambers says. “They can also play an essential role in developing a positive fraud culture by helping remove the negativities attached to fraud and take an approach of being partners and allies—for example, depersonalize the processes and procedures when talking about fraud by anonymizing the instances and focusing on the themes, trends, and lessons learned instead.

“This will help more people become comfortable discussing fraud. Emphasize that your goal is not to police fraud but to build a safe environment for business departments to raise issues and concerns,” he says. “While the responsibility of establishing and operating effective internal whistleblowing procedures lies with the executive, reporting to the board, internal audit has an important role as a trusted advisor to the board and the business by promoting whistleblowing best practices and advising on where change is needed.”

Changing the Fraud Regulatory Landscape

In December 2021, the U.S. White House issued the United States Strategy on Countering Corruption report. The strategy outlines a whole-of-government approach to elevating the fight against corruption with five key pillars:

1. Modernizing, coordinating, and resourcing U.S. government efforts to fight corruption,

2. Curbing illicit finance,

3. Holding corrupt actors accountable,

4. Preserving and strengthening multilateral anti-corruption architecture, and

5. Improving diplomatic engagement and leveraging foreign assistance resources to achieve anti-corruption policy goals.

The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) also released government-wide anti-money laundering and combating the financing of terrorism (AML/CFT) priorities in June 2021, which include fraud. FinCEN has issued several fraud-related advisories, in particular concerning business email compromise, email account compromise, and COVID-19.

There have been significant developments in the U.K. approach to combating fraud as well, including the Economic Crime (Transparency and Enforcement) Act 2022. In addition, the Economic Crime and Corporate Transparency Act 2023 aims to strengthen powers to tackle illicit finance and reduce economic crime, including fraud. In June 2021, the Law Commission launched a consultation on behalf of the British government seeking views on whether and how the laws relating to corporate criminal liability can be improved so that they appropriately capture and punish criminal offenses committed by corporations and their directors or senior management.

“Organizations need to prepare for the increased scrutiny and accountability of fraud from the government, regulators, and the public—foremost, it’s about minimizing risk and preparedness,” Chambers says. “Boards, internal audit functions, and employees all need to take a more proactive role in the fight against fraud.

“Organizations must implement and communicate clear fraud policies and procedures, and monitor their adherence and relevance,” he said. “They must also conduct regular and thorough fraud risk assessments that consider the internal and external factors impacting the business and develop a strong fraud prevention culture.”