Addressing dynamic threats of fraud.

• Author: Verick, Pamela

Consider this hypothetical scenario: The external auditor for a reputable Fortune 500 conglomerate uncovers an accounting anomaly that, at first, appears innocuous. A few payments cannot be accounted for. An investigation soon leads to the embarrassing discovery that a high-level manager, over several years, had embezzled more than $10 million from the company resulting in the need for an earnings restatement and a slew of negative publicity.

Think this can't happen in your company? Think again. Threats from fraud are dynamic. Vulnerabilities evolve based on an organization's people, policies, processes and practices. It is, therefore, critical that organizations identify fraud risk and evaluate the potential indicia of fraud within their financial and operational processes.

For financial executives, that often begins by understanding how the organization defines fraud. Some focus on intentional acts that result in a material misstatement in financial statements, while others are more expansive and consider deception, illegal acts, falsities and the misuse or misapplication of an organization's assets.

Organizations often define fraud in their fraud control policy, which describes its strategy and framework for how fraud is to be addressed on a proactive and reactive basis. This includes clearly defined roles and responsibilities for the evaluation, mitigation, monitoring and investigation of fraud within the organization.

No matter how an organization defines fraud, it is important that financial executives know what it means in the context of their functional area of responsibility. That means everyone from the chief financial officer, controller, treasury and cost accounting departments to the accounts payable and receivable clerks, and all those in between.

Establishing a common understanding of the types of fraud that could impact the organization is also critical to the ability of the executives to help combat fraud. Whether schemes involve fraudulent financial statements, asset misappropriation or acts of corruption involving bribery, conflicts of interest or illegal gratuities, those in finance often see indicators and patterns of fraud before other functions in the organization are able to put the pieces of the fraud puzzle together.

For that reason, it is critical that financial executives have a heightened awareness of the types of red flags--or warning signs--that raise concerns about the propriety of a transaction or the...