Fraud Risk Management: a Guide to Good Practice

Fraud risk management A guide to good practice Acknowledgements This guide is based on the fi rst edition of Fraud Risk Management: A Guide to Good Practice. The fi rst edition was prepared by a Fraud and Risk Management Working Group, which was established to look at ways of helping management accountants to be more effective in countering fraud and managing risk in their organisations. This second edition of Fraud Risk Management: A Guide to Good Practice has been updated by Helenne Doody, a specialist within CIMA Innovation and Development. Helenne specialises in Fraud Risk Management, having worked in related fi elds for the past nine years, both in the UK and other countries. Helenne also has a graduate certifi cate in Fraud Investigation through La Trobe University in Australia and a graduate certifi cate in Fraud Management through the University of Teeside in the UK. For their contributions in updating the guide to produce this second edition, CIMA would like to thank: Martin Birch FCMA, MBA Director – Finance and Information Management, Christian Aid. Roy Katzenberg Chief Financial Offi cer, RITC Syndicate Management Limited. Judy Finn Senior Lecturer, Southampton Solent University. Dr Stephen Hill E-crime and Fraud Manager, Chantrey Vellacott DFK. Richard Sharp BSc, FCMA, MBA Assistant Finance Director (Governance), Kingston Hospital NHS Trust. Allan McDonagh Managing Director, Hibis Europe Ltd. Martin Robinson and Mia Campbell on behalf of the Fraud Advisory Panel. CIMA would like also to thank those who contributed to the fi rst edition of the guide. About CIMA CIMA, the Chartered Institute of Management Accountants, is the only international accountancy body with a key focus on business. It is a world leading professional institute that offers an internationally recognised qualifi cation in management accounting, with a full focus on business, in both the private and public sectors. With 164,000 members and students in 161 countries, CIMA is committed to upholding the highest ethical and professional standards of its members and students. © CIMA 2008. All rights reserved. This booklet does not necessarily represent the views of the Council of the Institute and no responsibility for loss associated to any person acting or refraining from acting as a result of any material in this publication can be accepted by the authors or publishers. 1 Fraud risk management: a guide to good practice Contents Introduction . 5 Fraud – its extent, patterns and causes . 7 1 1.1 What is fraud? . 7 1.2 The scale of the problem . 9 1.3 Which businesses are affected? . 11 1.4 Why do people commit fraud? . 13 1.5 Who commits fraud? . 15 1.6 Summary . 16 Risk management – an overview . 17 2 2.1 What is risk management? . 17 2.2 Corporate governance . 17 2.3 The risk management cycle . 19 2.4 Establish a risk management group and set goals . 20 2.5 Identify risk areas . 20 2.6 Understand and assess the scale of risk . 20 2.7 Develop a risk response strategy . 22 2.8 Implement the strategy and allocate responsibilities . 22 2.9 Implement and monitor suggested controls . 22 2.10 Review and refi ne and do it again . 22 2.11 Information for decision making . 22 2.12 Summary . 23 Fraud prevention . 24 3 3.1 A strategy to combat fraud . 24 3.2 Developing a sound ethical culture . 26 3.3 Sound internal control systems . 32 3.4 Summary . 36 Fraud detection . 37 4 4.1 Detection methods . 37 4.2 Indicators and warnings . 39 4.3 Tools and techniques . 41 4.4 Summary . 43 Responding to fraud . 44 5 5.1 Purpose of the fraud response plan . 44 5.2 Corporate policy . 44 5.3 Defi nition of fraud . 45 5.4 Roles and responsibilities . 45 5.5 The response . 47 5.6 The investigation . 48 5.7 Organisation’s objectives with respect to dealing with fraud . 50 5.8 Follow-up action . 50 5.9 Summary . 51 2 Appendices Appendix 1 Fraud and the law . 52 Appendix 2 Examples of common types of internal fraud . 57 Appendix 3 Example of a risk analysis . 60 Appendix 4.

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