Summary
According to the article by SmartCEO (2014), occupational fraud remains a big issue in today’s business. Occupational fraud generally refers to intentional employee misdemeanor which results in loss of money by a business. In most cases, such frauds go unnoticed and are usually discovered either accidentally or through the actions of a whistleblower. The article suggests that smaller entities are at a higher risk compared to larger ones. Occupational fraud also occurs across all industries and geographic areas. It means that this issue not only affects businesses in a particular industry but all industries in general. Business owners put more focus on bottom lines and operational logistics. As a result they often dedicate less time to prevent and manage fraud risks. Generally, they tend to discover the fraud or loss after a breach. Most of the time, this happens when it is too late to take any action.
Whenever there is suspicion or the reporting of a fraud case, it is paramount to commence an investigation in an efficient, timely and appropriate manner. Being in front of the issue can make the difference between a big loss and probable recovery. Recent estimates indicate that in a typical organization, 5 percent of its revenues are lost each year due to employee theft. There are three categories of occupational fraud and abuse. The first category is the so called asset misappropriations. These are schemes involving the theft or plunder of an institution’s assets. Such assets can include money or other non-monetary schemes. Another category is corruption: in this case, people use their influence in a particular business transaction to gain unauthorized benefits in contravention their duty or to the employer. Lastly, fraudulent financial reporting involves schemes whereby an organization’s financial statements are falsified to give an impression of either increased or decreased profitability.
There are factors that make a person more susceptible to commit fraud. They are namely: perceived opportunity, perceived financial need and the ability to justify the act. Research indicates that reducing opportunities for fraud is the most effective way to reduce the risk. Employees therefore need to be trained and their fraud awareness furthered on a regular basis. This phenomenon has been growing over the years and can have devastating effects. It can cripple business organizations or even drive them to total failure (SmartCEO).
Impact on internal auditing
Internal auditing provides a measure to detecting occupational fraud. It is a tool that is applicable to all businesses. Occupational fraud has a huge, but usually undetected impact on internal auditing practice itself. Due to its subtle nature, it is very difficult to detect even while carrying out the audits. This can be as a result of collusion between employees. Furthermore, the auditors themselves might be compromised. The resulting situation is the filing and reporting of false internal audits that lack integrity. An organization can therefore steadily loose income over a period of time.
However, there are challenges that businesses face in the implementation of proper auditing mechanisms. Currently, internal audit departments the world over and different industries are in the midst of a transition. The transition is evolutionary in nature and in this process they are faced with great challenges and opportunities. Due to the vast knowledge the internal audit of a company possesses- from daily operations all the way to top management- these departments have an increased expectation. They are required to move beyond financial reporting and compliance responsibilities. More demand is put on them to implement risk assessments of enterprises and focus on operational risks facing the various organizations.
Nevertheless, many departments are gearing up to align the coverage of audits with operational and business initiatives. Other areas being aligned are risky Areas including major programs, international expansion transactions, contract management and major initiatives directed at change. This is a daunting task that requires a great amount of effort. The major challenges facing internal audit in achieving these expectations are the hiring and training of the required staff. These personnel are needed for the compliance and expanded role of the audits. They are also needed to interact and align with other risk management operations in the firm. An additional task is to measure the value of the services they offer as they take on extra business activities. Keeping up with these challenges and taking hold of the opportunity to improve business performance will demand that internal audit leaders change their way of thinking and react swiftly.
Hiring and retaining the appropriate talent is the greatest challenge in internal audit. Many companies might be having requisite financial resources. However, discrepancies in the coverage of internal audits and difficulties in completion of internal audit plans arose from a number of issues. Increased functions of internal audits put more workload on the auditors. Some auditors operate at less than 90% of the headcount budgeted for. A high turnover of staff also caused additional problems.
Aligning the skills of internal audit staff with the needs and demands of an organization has proven to be a daunting task. Most companies experience an overabundance of internal auditors with the skills of financial reporting and compliance. Surveys have found that many companies have a shortage of staff trained in fraud detection and prevention. There is also a significant gap in skills required in some key risk areas. These include major programs, tax, transactions and lastly, contract auditing. It is difficult even for large companies to find staff well adept in local law and customs applied in international audit coverage.
Possible solutions
For internal auditing to fulfill its mandate under the IPPF, radical changes need to be made in the entire process. There is need to leverage the knowledge and technology required to improve coverage of internal audits. Organizations should develop metrics that indicate the actual values of expanded services. This is because most companies only measure their value on savings gained on costs but not on the value provided by functions of internal audits. Tracking value increases in application as internal audit gains more involvement in other risk areas. These areas include contract and program auditing. Real-time auditing should also be implemented via automated systems. This enables the monitoring of activities as they occur.
Internal auditing has the potential to not only add value to fraud detection and prevention but many other business aspects as well. Customer data can be effectively secured through thorough audit of activities the responsible department. Management of risks associated with third parties can also be enhanced through internal audits of procedures and operations. Finally the integrity of a business remains upheld through proper audits both internal and external.
Reference
SmartCEO,. (2014). Retrieved 8 February 2016, from http://smartceo.com/eisneramper-occupational-fraud-still-a-big-issue-for-business/
