Internal Auditing and Fraud

This practice guide summary will discuss how Internal audit can add value to the organization through its role in helping to deter and identify fraud. Fraud results in negative financial, reputational, psychological, and social effects on an organization.  To minimize the risk associated with fraud it is important for organizations to have a strong fraud program that includes awareness, prevention, and detection programs.

Fraud Awareness

Fraud schemes are often ongoing and can last for months or years. Employees commit fraud when they have access to confidential information and internal controls are inadequate or management can override controls without question.

Most frauds have the following characteristics:

• Pressure or incentive – need the fraudster is trying to satisfy by committing the fraud.
• Opportunity – the fraudster’s ability to commit the fraud.
• Rationalization – the fraudster’s ability to justify the fraud in his or her mind.

There are often red flags to indicate individuals might be committing fraud such as spending lavishly, becoming more secretive of their activities, and reluctance to take vacation or sick time.  While none of these red flags means an employee is actually committing fraud, a combination of occurrences may indicate the need for inquiries and increased audit attention.