Uncovering hidden risks: with angry stakeholders and regulators demanding a harder line on fraud, firms must go on the offense to uncover hidden risk with a triple layer of controls that prevent, detect and actively manage threats.

• Author: Marks, Jonathan T.
• Position: INTERNAL CONTROLS - Association of Certified Fraud Examiners - Report

Bad economies tend to expose the dark underbelly of corporate activities: namely fraud. Market deterioration has brought old schemes to light and new ones are being committed at an alarming rate. Once hidden under rising performance figures, many investment frauds, mortgage frauds and complex Ponzi schemes--such as the Bernard Madoff scam--are collapsing in the tight economy.

But the same economy responsible for exposing fraud is also making it easier for employees to find ways to set schemes in motion. A new breed of offenders is finding cunning ways to do so in a marketplace ripe for criminal activity.

Losses from fraud are mounting. To wit: the Association of Certified Fraud Examiners reported that organizations in the United States lost an estimated 7 percent of their annual revenues, or $994 billion, last year to fraud, up from $652 billion (about 5 percent of revenues) in 2006. A lack of adequate internal controls was cited by the examiners as one of the most common factors allowing fraud to occur.

Despite laws and federal actions to curb abuse, the trend is expected to continue. Earlier this year, John S. Pistole, deputy director of the Federal Bureau of Investigation, reported to the Senate Judiciary Committee an "exponential rise" in white-collar crime cases. These include financial statement manipulation, accounting fraud and insider trading.

Angry stakeholders, regulators and the public are demanding that companies take a harder line on fraud. To limit losses in this volatile environment, organizations must go on the offense to uncover hidden risk with a triple layer of controls that prevent, detect and actively manage the threats most organizations face from fraud.

Countering fraud in a high-risk environment requires targeted controls that reduce the opportunities and emotional distress that can lead to it in the first place. These measures must be integrated into every business process, every employee task and every training module corporate-wide to be truly effective.

Identify High-Risk Areas

A fraud risk assessment and a cultural assessment can provide valuable insight into staff attitudes and the extent of opportunity to commit fraud. Armed with this understanding, organizations can begin to identify where additional controls should be placed for maximum benefit.

A fraud risk assessment identifies where organizational activities currently take place: what activities are outsourced, moved between trading partners and...