Best Practices for the Prevention and Detection of Fraud

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Recommended: Lessons from corporate scandals

There is usually shock and disbelief when fraud is discovered in a corporation. Fraud is a very general term that refers to the deliberate deception to secure an unfair or unlawful gain. Fraud involves a theft that the perpetrator often tries to conceal (Farrell and Franco 1999). The perpetrator then attempts to transfer the stolen assets or resources into personal assets or resources (Farrell and Franco 1999). In general, financial fraud is made up of four broad categories consisting of fraudulent financial reporting, misappropriation of assets, expenditures and liabilities for inappropriate intentions, and fraudulently obtained revenues and assets that include avoided costs and expenses (PricewaterhouseCoopers 2008). A company that attempts to prevent fraud avoids a catastrophic risk. A culture of honesty and ethics, antifraud processes and controls, and an appropriate oversight process are the best practices for the prevention and detection of fraud.

In 2002, after a chain of highly publicized corporate scandals, Congress passed the Sarbanes-Oxley Act, intending to restore investor confidence in publicly traded securities. Traditionally, management and the board of directors were in charge of managing the company and preparing financial statements. However, this new law makes it clear that they are also in charge of creating, confirming and supervising effective internal controls in order to avoid fraudulent financial reporting. When fraudulent financial reporting does arise, they are expected to detect it in a timely manner. (PricewaterhouseCoopers, 2003) Common issues considered to be the primary factors that allow fraud to occur consist of a lack of internal controls and internal controls that are overridden by th...

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...s/view.asp?ArticleID=638 > (5 March 2011)

Association of Certified Fraud Examiners. 2008. “ACFE Fraud Prevention Check-up.”

< http://www. acfe.com/documents/Fraud_Prev_Checkup_IA.pdf > (5 March 2011).

Association of Certified Fraud Examiners. 2010. “Report to the Nations on Occupational Fraud

and Abuse.” < http://www.acfe.com/rttn/rttn-2010.pdf > (5 March 2011).

Farrell, Barbara R. and Joseph R. Franco. 1999. “The Role of the Auditor in the Prevention and

Detection of Business Fraud: SAS No. 82.” Western Criminology Review 2/1/ [Online].

Available: http://wcr.sonoma.edu/v2n1/v2n1.html. (5 March 2011).

PricewaterhouseCoopers. 2003. “Key Elements of Antifraud Programs and Controls.” [Online].

Available: http://www.som.yale.edu/faculty/Sunder/FinancialFraud/Elements%20of%

20Antifraud%20Program%20-%20White%20Paper.pdf. (5 March 2011).

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