Tips for Tightening Fraud Controls

​EVEN THE MOST stringent antifraud controls are ineffective when top management can override them. And between 60 to 80 percent of all controls are still manual, not automated, and thus more easily overridden, according to a recent KPMG survey.

Deference to management and reluctance (or inability) on the part of a board of directors or audit committee to look behind the override of internal controls have resulted in huge fraud losses.

Now some top corporations, particularly Fortune 10 companies, have begun to directly charge audit committees to look for and into any management overrides that might introduce false financial

Information into the corporate ledger, according to Timothy P. Hedley, a partner at KPMG Forensic. That’s one of the antifraud trends noticed by Hedley and Lawrence S. Raff, partner in charge of KPMG’s 404 Institute, who presented their findings in a recent Webinar.

For assistance in identifying such fraud, companies can turn to a recent paper published by the American Institute of Certified Public Accountants (AICPA). It recommends that internal audit committees brush up on their understanding of the company’s business, maintain a constant skepticism, brainstorm to identify fraud risks, cultivate a “vigorous” whistleblower program, and adopt other measures.

To allow their audit committees to focus on fraud, some companies are now reassigning their duties to other committees, says Hedley. Compliance with laws and regulations might be vested in the organization’s compliance committee, for instance.

McGraw-Hill does just that, keeping internal audit separate from the compliance process, says Talia Griep, senior vice president and controller at McGraw-Hill. “This keeps internal audit independent and imbeds the compliance process within the individuals responsible for the control environment,” she says.

Hedley also notes that leading-edge companies are expanding their codes of conduct to cover vendors and contractors. “You want to make sure the people you are doing business with have the same standards as you.”

Hotlines offer another way to fight fraud. They have been hot for years, but a new trend is for companies to monitor suspected cases of fraud to ensure that there is no retaliation against the whistleblower, reports Hedley.

In addition, hotline calls are now being used for training employees how to report fraud. Though identifying information is obscured, employees get to hear what a real tip sounds like.

Corporations are also learning that tipsters get frustrated, and less likely to inform again, when they never hear anything about the case. It’s becoming more common to get back to informants with updates, Hedley says. Sometimes informants are given a case number, which they can use to track an investigation.