Fundamentals of Risk Management

Control of financial risks
Fraud
One of the key areas of financial risk faced by all organizations is fraud, which can 
be committed by employees, customers or suppliers. Also, fraud may be committed 
by the organization itself by falsely reporting the results of operations. The Sarbanes–
Oxley Act requirements are primarily aimed at the avoidance of fraudulent reporting 
by organizations.
Fraud occurs when there is the motive for undertaking it, the organization has 
assets that are worth stealing, there is an opportunity to undertake the theft or fraud 
and there is a lack of adequate control. Concerns about fraud should also extend
to measures that are designed to reduce theft. These will include the provision of 
security fences and gates, as well as the provision of security guards, improved
lighting and secure building access.
Organizations need to undertake an analysis of the effectiveness of their fraud 
controls. This is an area where internal audit is often involved. This analysis should 
check for losses in terms of money or goods, as well as evaluating areas where
controls are insufficient. The analysis should be a proactive review that should
include an analysis of vulnerable assets, who is responsible, how fraud might be 
undertaken and the effectiveness of the existing controls.
As well as undertaking an analysis of the effectiveness of existing controls, organ-
izations should make an annual review of circumstances where fraud has been
detected. These reports should be supplied to the audit committee.
In order to prevent fraud, the organization should introduce a corporate fraud 
policy that sets out the attitude of the organization towards fraud, the methods for 
controlling and investigating it, responsibilities for fraud control and details of
the resources that are allocated to fraud detection. The arrangements for whistle-
blowing and a policy for dealing with persons suspected of committing fraud should 
also be established.

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