Definition:
Fraud is the intentional activity to gain personal benefit directly or indirectly illegally, against organization or entity policy. It is ultimately different from error and corruption.
An elementary example of fraud is that the accounting staff pay salary to fake employee’s account that creates by himself is also called fraud.
In such a case, accounting staff is intentionally creating the name of the employee, and bank account order to make payment and then get a direct benefit from it.
It happens in various forms and differently from time to time based on the situation and opportunity that the fraudster has, and It also based on the subject matter.
Necessity steps to protect fraud.
01.Employee Due Diligence
This is the important point to do, and it normally does at the time of recruitment. The company has to set proper recruitment policies and procedures to ensure that all-important information about employees is obtained and the background is checked. Doing this company could minimize the risk of hiring an employee whose fraud was ever committed.
02. Mandatory Job Vacation
This is one of the most recommended procedures that the company should have to managed fraud, especially for high-risk positions. Those positions include payments, correction, purchasing, and sales. Sale says the correction officer is a vacation for three weeks and replace the new one and let see if the new one found and problem made by the old. These policies are mandatory and should not have any exceptions.
03 .Setting up Internal Audit or “Fraud Department”
Setting up the internal audit department or fraud department is one type of fraud risk management by the Board of Directors. Now it is globally aware and accepted word wild as an effective strategy.
For effective use of internal audit, internal audit must be a disconnect from the operation and under supervised by the audit committee or by Board. For a small company, the management and owner are the same.
No matter it is, the audit department must be under control of the owner.
04. Build the Culture of Honesty and Integrity
This is an important part of fraud risk management and is morally done by top management by showing a sense of honesty and integrity. Management should show honesty to its staff and then make it become culture and core value.
05. Whistle-blowing Policies
Well, whistle-blowing policies are morally set when the Board of Directors wants to promote Honesty and Integrity in the company. This is also set when the Board believes that staff might know it has happened in the company, but they are afraid to disclose it to management.
The whistle-blowing concept allows staff to report the fraud they found to the top management, normally the audit committee or board. The report could be done by email, phone, or mailbox.
06. Setting up Sound Strong Internal Control
The company should set up sound string internal control, for example, segregation of duty, physical control. Segregation of duty; for example, one person should not control the whole process.
One person responsible for purchasing, receiving goods, and paying suppliers, for example. The security camera should be set at the warehouse, cashiers, or the other sensitives place.