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The Certified Fraud Examiners’ Fraud Prevention Checkup - An Introduction

The Certified Fraud Examiners’ Fraud Prevention Checkup - An Introduction. Toby J.F. Bishop CFE CPA FCA President & Chief Executive Officer Association of Certified Fraud Examiners. Current Fraud Concerns. Fraudulent financial reporting Legal risks for executives Civil liability

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The Certified Fraud Examiners’ Fraud Prevention Checkup - An Introduction

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  1. The Certified Fraud Examiners’ Fraud Prevention Checkup- An Introduction Toby J.F. Bishop CFE CPA FCA President & Chief Executive Officer Association of Certified Fraud Examiners

  2. Current Fraud Concerns • Fraudulent financial reporting • Legal risks for executives • Civil liability • Criminal (jail time) • Financial losses for investors • Reputation damage to companies/brands • Crisis of confidence

  3. An Appropriate Response • Fraud prevention is 80% of the solution • Objective evaluation of an entity’s fraud prevention processes • Prompt action to fix gaps/breakdowns • Annual testing • Ongoing fraud education and training

  4. The Certified Fraud Examiners’ Fraud Prevention Checkup • A high-level checkup of an entity’s fraud prevention processes • Form available free at www.CFEnet.com • Identifies major gaps • Provides an overall score

  5. Benefits to Entities That Use This Tool • It provides insights that senior management, the board of directors and audit committee will value highly • It could save the entity from catastrophic financial and reputational losses • It could help build confidence in the entity internally and by the public • It’s simple and inexpensive

  6. Benefits for CFEs Who Apply This Tool • It provides insights that senior management, boards of directors and audit committees will value highly • It can be performed very inexpensively • It can help you win new clients and deepen existing relationships • It is being promoted in the media by the ACFE

  7. But CFEs Should Manage Their Liability Risks • Risk of false perception of assurance • Be careful not to guarantee “no fraud” • Anti-fraud controls in existence vs. operating effectively • Ongoing frauds may be uncovered • Legal risks to entity evaluated if control gaps are identified but not fixed

  8. Who Should Perform the Checkup? • Ideally a collaboration between a Certified Fraud Examiner and knowledgeable people inside the entity (e.g., internal auditors) • Helpful to interview senior management • But also talk to other levels of employees to get a reality check

  9. The Certified Fraud Examiners’ Fraud Prevention Checkup • The seven elements: • Fraud risk oversight (20 pts) • Fraud risk ownership (10 pts) • Fraud risk assessment (10 pts) • Fraud risk tolerance and risk management policy (10 pts) • Process level controls/anti-fraud re-engineering (10 pts) • Environment level controls (30 pts) • Proactive fraud detection (10 pts)

  10. Fraud Risk Oversight • To what extent has the entity established a process for oversight of fraud risks by the board of directors or others charged with governance (e.g., an audit committee)?

  11. Scoring – Risk Oversight • Score: Award from 0 (process not in place) to 20 points (process fully implemented, tested within the past year and working effectively). • Note: For all questions, award no more than half the available points if the process has not been tested within the past year.

  12. Fraud Risk Ownership • To what extent has the entity created “ownership” of fraud risks…? • Chief Executive currently “owns” the risk, but needs to make others responsible too • A member of senior management, and • All business unit managers

  13. Fraud Risk Assessment • To what extent has the entity created an ongoingprocess for identifying the significant fraud risks to which the entity is exposed? • Potentially catastrophic risks • Costly risks • Tailored to the particular entity • Can be part of enterprise risk management

  14. Fraud Risk Tolerance and Risk Management Policy • To what extent has the entity identified and had approved by the board of directors: • Its tolerance for different types of fraud risks? • A policy on how it will manage its fraud risks? • Align risk tolerance of management with that of board of directors & audit committee • Business decisions to reduce fraud risks

  15. Process Level Controls/Anti-Fraud Re-engineering • To what extent has the entity implemented measures to reduce each of the significant fraud risks identified in its risk assessment, through: • Anti-fraud process re-engineering (removing the opportunity)? • Process level controls to prevent, deter and detect fraud

  16. Environment Level Anti-Fraud Controls • To what extent has the entity implemented a process to promote ethical decisions, deter wrongdoing and facilitate two-way communication on difficult issues? • Most difficult area to evaluate • Difference between existence and operating effectiveness of controls can be crucial • Employee surveys are highly desirable

  17. Key Elements of Environment Level Controls • Senior member of management responsible • Values-based code of conduct • Regular training (including fraud) • Advice and reporting systems • Investigation plans • Monitoring of compliance

  18. Key Elements of Environment Level Controls • Regular measurement of achievement of ethics/compliance and fraud prevention goals • Employee attitude surveys, fraud measures • Incorporate ethics/compliance and fraud prevention goals into performance measures for evaluating/compensating employees

  19. Proactive Fraud Detection • To what extent has the entity established a process to detect, investigate and resolve potentially significant fraud? • Proactive fraud detection testing • Targeted at significant fraud risks identified in the fraud risk assessment • Embedded fraud detection/audit “hooks” • Automated e-mail monitoring (where legal)

  20. Interpreting the Entity’s Overall Score • Desirable score is 100 points • Most entities will fall short initially • Not currently considered a “material weakness in internal controls” that is a reportable condition • But significant gaps should be closed promptly to avoid disaster

  21. Recommended Next Steps • Study the ACFE Fraud Prevention Checkup • Promote it to your current and target clients • Perform checkups and identify major gaps in clients’ fraud prevention processes • Providing anti-fraud consulting services to help clients fix those gaps

  22. Thank You • Any questions? • ACFE Fraud Prevention Checkup pdf file available at www.CFEnet.com. PowerPoint presentation available to members shortly. • +1 (512) 478-9070

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