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UM Business Preventing Fraud Roles & Responsibilities Discussion

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Discussion Board Post

During the past year, your company has discovered three major frauds. The first was a $3.9 million theft of inventory that had been going on for six years. The second was a $2.8 million kickback scheme involving the most senior purchasing agent. She had been allowing certain customers to overcharge for products in return for personal payments and other financial favors. The third was an overstatement of receivables and inventories by a subsidiary manager to enhance reported earnings. Without the overstatement, his unit’s profit would have fallen far short of budget. The amount of overstatement has yet to be determined. All three of these frauds have been reported in the financial newspaper and have been embarrassing to the company. 

In response to these incidents, the board of directors has demanded that management take “positive steps to eliminate future fraud occurrences.” In their words, they are “sick and tired of significant hits to the bottom line and negative exposure in the press.” The responsibility to develop a program to eradicate fraud has fallen on your shoulders. You are to outline a comprehensive plan to prevent future frauds. In devising your strategy, outline the roles the following groups will play in preventing fraud:

o Top Management

o Middle Management

o Internal Audit

o Corporate Security

o Audit Committee

o Legal Counsel

Why is each of the groups above reluctant to take the responsibility for detecting and preventing fraud? Who should be responsible? 

Debate the issues.

Discussion Board Replies

1. The company needs to implement internal controls to help prevent and detect the risk of fraud. By establishing segregation of duties, independent checks, proper documents and records, and proper authorization, the company can reduce the risk of fraud and have a way to discover it before it becomes a more significant problem. Another essential way to prevent fraud is to “create a culture of honesty, openness, and assistance” (Albrecht et al., 2019, p. 113). One way to reduce fraud is to have better-skilled and trained staff in the interview and hiring process. Training in the interview process will allow management to hire more qualified and ethical staff. Implementing an employee awareness program allows employees to become more educated on the effects of fraud. It gives them guidelines on what to do if they suspect fraud in the workplace. Creating a positive environment and establishing expectations on conduct, having an open-door policy can motivate employees to be more honest. Creating a code of conduct that outlines the expectations is beneficial in preventing fraud. Not only do the expectations need to be precise, but also the consequences of failing to follow the expectations. Consideration should be given to the area of employee assistance programs. Research has shown that this can successfully reduce the amount of perceived pressure an employee has. 

Top management is responsible for creating a positive “tone at the top” (Albrecht et al., 2019, p. 122). Top management should ensure that middle management is being taught and trained in fraud and model the behavior established in the code of conduct. They should identify areas of fraud risk and ensure that controls are in place that will detect fraud. 

Middle Management needs to follow the guidelines and model the behavior established by top management. They need to establish evaluation and monitoring systems for employees to detect fraud. They need to be trained and skilled in the hiring process to ensure that the hired staff is ethical and does not have a fraudulent background. 

Internal auditors will assist upper management in evaluating internal controls and monitoring compliance with the controls. The internal auditor should detect, prevent, and monitor fraud risks (The Institute of Internal Auditors, 2019). Internal audit will be responsible for investigating and examining documents. 

Corporate security will investigate and pursue any reports of fraud.  

Audit committee members will also monitor the control systems and the effectiveness of the internal auditors and top management. 

Legal counsel top management should be knowledgeable on fraud litigation and internal investigations. They should guide management and know company policy regarding disciplinary action and or legal action taken on fraudulent behavior. 

Each of these individual groups is reluctant to take on the responsibility of detecting and preventing fraud because they feel it is another group’s responsibility (Albrecht, et al., 2019, p. 120). Every member and level of the organization is responsible for detecting and preventing fraud. Training and educating all staff on fraud detection is essential and provides ways of safely reporting suspicious activity without fear of retaliation. 

2. There is a significant need for the company to make changes in their hiring, procedures, internal controls and audits with the amount of fraud that has been taking place. Each of the following departments need to make changes to their business practices to prevent future fraud like the ones already committed. 

Top management needs to set a new tone for the company as one that will be ethical, honest and free of any fraudulent behavior and none of the above will be tolerated. The first order for top management is to prosecute the frauds that has already been discovered to the fullest extent to send a message that this type of behavior will not be tolerated at this company. 

Middle Management will need to reevaluate their hiring procedures to make sure they are hiring the right people. In the hiring process they must verify the person’s background and set the expectation of honesty and integrity in the company.

Internal Audit needs to have a plan to evaluate the weak points of vulnerability of the company and their procedure. Segmentation of duties need to be put in place and monitored. They need to set up independent checks of the safe guards they have put in place. The more they are checking these things the less the loss will be if there is fraud found. Letting a fraudulent activity go unnoticed only makes the loss larger. 

Corporate Security can be set in place to monitor the procedures and personal.

Audit Committee should be implementing internal audits and know when to ask for external audits that will give a big scope of vulnerabilities within the company.

Legal Counsel needs to prosecute anyone that commits any fraud against for on behalf of the company to set the example that this won’t be tolerated in the company and those who don’t follow will be prosecuted. 

Each of these departments plays a roll in fighting fraud within the company and all should take responsibility when fraud is committed within the company. When one of these departments isn’t doing their job there will be a weak point and only welcome fraud into the company. When fraud is committed it should be a team effort to make sure it doesn’t happen again. 

3. All key stakeholders must be involved to develop a comprehensive plan to prevent future fraud. Top Management should establish a robust ethical culture by demonstrating integrity and supporting anti-fraud policies. They should communicate the company’s expectations regarding reporting and ethical behavior. Middle Management is essential in implementing anti-fraud measures and monitoring day-to-day operations (Commonwealth Froud Prevention Centre, 2023). They should undergo continuous fraud detection and prevention training, ensuring employees adhere to internal controls. Internal Audit must design, implement, and review internal controls to deter fraud while ensuring compliance with company policies. Continuous risk assessment and data analysis techniques can help identify potential vulnerabilities or suspicious activities. 

Corporate Security should focus on physical and digital security measures, including surveillance, access controls, and cyber security practices. They must work closely with Management to detect fraudulent activities that risk the business’s assets, reputation, or financial stability (Commonwealth Froud Prevention Centre, 2023). The Audit Committee oversees all fraud mitigation efforts and ensures they get appropriately executed, including internal audit recommendations. They are responsible for investigating allegations of fraud or ethical misconduct within the organization (ISACA, 2019). Legal Counsel guides on legal compliance issues related to fraud prevention measures and helps conduct investigations of suspected fraud cases (ISACA, 2019). They will be instrumental in reviewing contracts and agreements to minimize exposure to fraud schemes like kickbacks. By engaging each of these groups in a coordinated effort at all organizational levels, your company can significantly reduce the occurrence of fraud in the future.

Each group may be reluctant to assume fraud detection and prevention responsibility due to fear of blame, lack of resources, or inadequate expertise. Top Management might prioritize business growth over robust internal controls (The UN Refugee Agency, 2023). Middle Management could focus more on operational efficiency or fear exposing their team’s wrongdoings. Internal Audit could be overwhelmed by their wide range of responsibilities. Corporate Security may not have suitable training in fraud detection (The UN Refugee Agency, 2023). The Audit Committee might lack sufficient authority to enforce corrective actions, while the Legal Counsel could be more concerned with legal compliance than proactive fraud mitigation.

No single group should take sole responsibility for fraud detection and prevention. A collaborative approach involving all mentioned parties can ensure comprehensive coverage of potential risks, shared expertise, and efficient use of resources to reduce organization fraud occurrences (The UN Refugee Agency, 2023). Each group must actively participate in designing and enforcing effective anti-fraud measures while ensuring open communication and timely information-sharing among all levels of Management.