Protecting Your Viability.

While no organization is immune to fraud, putting the right controls in place can help minimize the impact on a company's bottom line

Fraud is a scourge on all businesses. Its frequent occurrence is a source of concern, yet many businesses remain unaware that fraud can threaten their

There are various types of fraud, such as embezzlement of funds or assets, theft of intellectual property, planned bankruptcy, misrepresentations or computer fraud. Corporate revenues, as well as expenditures, can be targeted for embezzlement. Bogus invoicing, deferred reports and fictitious clients are among the fraudulent tactics that impact revenues. Fictitious suppliers and employees, counterfeit cheques and bloated expense reports have a direct effect on expenditures. And asset embezzlement affects inventory as well as fixed assets.

The reasons and opportunities that drive employees to commit fraud are numerous. Personal drives or extraneous circumstances, such as indebtedness or the possibility of instant wealth resulting from a fraudulent act, can both be motives. An employee's privileged access to business systems, combined with their knowledge of them, provide opportunities for that employee to commit fraud. The perpetrator is usually one who has knowledge, experience and intelligence. The implementation of adequate intemal controls, however, can help eliminate these opportunities.

Fraud prevention

Internal controls. An internal control system is a set of guidelines, monitoring procedures and administrative structures set up by management to ensure orderly and efficient company operations. In addition, it gives a reasonable degree of certainty regarding the reliability of financial ledgers and data. The application of adequate control procedures makes it possible to minimize fraud risks.

Internal controls have little effect on an employee's motives and capacities for committing fraud. They act more on the opportunities that employees may have. Internal controls include specific monitoring systems, general data processing controls, general personnel controls and a corporate monitoring environment.

The segregation of incompatible functions and the fragmentation of tasks are of primary importance to internal controls. Authorizations and responsibilities must be delegated to different people to avoid errors, but also to prevent fraudulent acts.

To avoid fraud in sales, for instance, a company should ensure as much as possible that the following tasks are performed by different people: transaction approvals, recording of transactions, goods delivery, dispatching of statements of account, custody of money and cashing deposits. Various measures for dividing tasks must also be implemented with regard to purchases, inventories, fixed assets and salaries. Internal controls are essential, and the company must continuously update its operating methods to remain competitive on the one hand, but also to ensure its long-term viability on the other.

A code of ethics.

Throughout history, activities related to trade and commerce have been regulated by conventions, rules or values enabling one party to determine if a partner is reliable, or if a commercial or financial undertaking is honest or fraudulent. Ethics attempt to contribute to this life experience of morality by theorizing such practices; they help clarify values. Moreover, ethics form an integral part of internal controls; they provide part of the corporate monitoring environment.

The importance of transmitting values indigenous to a company via a code of ethics stems from the fact that employees do not all share the same moral outlook; there is no standard to tell us whether a situation is good or bad, and problems encountered in a company are often resolved by following a corporate code of ethics. Where initiatives in ethical issues are concerned, there must be leadership and a commitment to act. Leaders must promote training in ethics and then appraise the related results.

The need to make employees aware of ethical issues is very important. Indeed, we may observe many frequently found behaviors that, on the outside, appear innocuous, but on a long-term basis, may lead to illegitimate acts if not curtailed in time. In fact, these acts or comments are often contrary to a sense of morality.

By eliminating these behaviours -- which can be harmful to business -- through the use of a code of ethics, the company can use this code as a powerful tool for minimizing fraud.

Specialists. Senior management must not rely solely on a controller or auditors to expose fraud, since these resources have many other responsibilities and are not specialists in the field. To settle disputes at the lowest possible cost and remain competitive in today's global market, you have to follow the right trails and do business with the right people.

While taking certain measures can expose illegal acts, cases of fraud are frequently uncovered by accident. Usually, fraudulent acts conceal an element of intentional complexity that makes them hard to untangle. Inevitably, a specialist must be called in, especially since such acts are increasingly acquiring an international dimension.

Specialists are skilled in providing strategic assistance, either for preventive action by making management aware of fraud risks and by thoroughly reviewing a company's internal control system, or for the specific purpose of making inquiries and solving problems pertaining to disputes, falsified information or fraud. They can quantify damages and, if your case goes to court, they can testify as expert witnesses for you.

Eve Gosselin is a CMA candidate and an associate in Dispute Analysis and Investigations at the Montreal office of PricewaterhouseCoopers. Michel Hamelin is vice-president of Dispute Analysis and Investigations at PricewaterliouseCoopers.

Comments                     Acts
"Everybody does it,"         Taking things that do
                             not belong to you
"It's always been doen this  Telling lies
  way."
"This doesn't hurt anyone."  Making misleading statements
"I just did like everyone    Conflicting interests
  else."
"The system is unfair!"      Lack of impartiality and Objectivity
"If you don't do it, I'll    Hiding information
  just ask
someone else."               Breaking laws