Fraud Risk Assessment

According to available global surveys, the absence of internal controls to prevent fraud contributes to nearly one-third of all fraud cases worldwide. A fraud risk assessment supports organizations in reviewing their entire risk universe, laying the foundation for developing an effective fraud risk management program.

It is essential for companies to proactively identify both internal and external risks that could significantly impact their reputation, result in civil or criminal liability, or threaten their assets.

The assessment typically covers four key areas:

1. Asset Misappropriation Risk
   Cash, inventory, and other company assets are always at risk of mismanagement, theft, and unauthorized payments, as well as employees using company resources for personal gain without approval.
2. Financial and Non-Financial Reporting
   Fraud in financial reporting often involves management override of controls to overstate revenues or assets and understate expenses or liabilities. Identifying discrepancies between financial and non-financial data can be a powerful tool for detecting fraud.
3. Regulatory Compliance
   During a fraud risk assessment, the organization’s compliance activities are evaluated to determine whether they genuinely support a culture of integrity, or are merely treated as a box-checking exercise. This includes reviewing the effectiveness of whistleblowing mechanisms, which are crucial tools for fraud detection, as many fraud cases are uncovered through internal reports.
4. Risk of Illegal Acts
   Fraudulent activities are inherently unlawful acts. The analysis reviews potential scenarios specific to the company’s operations, examining characteristics, warning signs, and methods of execution.

The fraud risk assessment includes five key steps:

1. Identification of risks
2. Quantification of risks
3. Definition of responses to risks
4. Monitoring and reviewing risks
5. Reporting on risks