FRAUD IS ON THE RISE. IT SEEMS AS IF every other week other week another study is released confirming the news that pressures related to the economic downturn have spurred a rise in internal fraud rates. The cause of this increase is understandable considering the combination of the downturn and its impact on the three tenets of the fraud triangle--perceived need, rationalization, and opportunity. Perceived need and rationalization are somewhat easy to explain. With employees facing stress from the stock market decline and housing bubble burst, personal financial pressures have increased. Simultaneously, many employees are being asked to take on more work for no additional--and sometimes less--compensation. In some cases, this leads to a feeling that the company "owes" them something in return.
The third factor--opportunity--is an area where internal auditing can make a significant impact. Internal auditing is responsible for making sure that controls to prevent and detect fraud are working. Yet as strong as these controls may be, they can never be, 100 percent effective. The reality is that some people, especially those in positions of power, can circumvent these preventive measures, making their activities difficult to detect.
The economic downturn has created another challenge for internal auditors. According to an IIA Research Foundation Global Audit Information Network Flash Survey, more than half of internal audit teams have had budget cuts in the past 12 months, with one-third experiencing layoffs in their department during that time. To protect against the growing risk of fraud, internal auditors must look for ways to increase effectiveness without increasing costs. Attempts to prevent fraud include developing policies and processes, implementing controls, conducting risk assessments, encouraging ethics training for employees, monitoring risk areas, and other similar strategies. But there's more internal auditing can do by tapping into the wealth of knowledge among employees about fraud and misconduct.
According to KPMG's Integrity Survey 2008-2009, 74 percent of U.S. employees have " personally seen" or have "firsthand knowledge of " specific categories of misconduct over the past 12 months. While that figure is perhaps dishearteningly high, encouragingly, 81 percent of these employees would be willing to notify their supervisor or another manager, and 44 percent reported they might use a tip hotline. Only 6 percent reported they...