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Spotting fraud.


The focus of this checklist is on how an organisation, whether in the private or public sector, can put simple measures in place to prevent fraud. It is important to recognise that everyone has a role in the process of spotting and preventing fraud.

There are many obvious advantages to spotting fraud. These include:

* saving money--it has been estimated that fraud costs the private sector alone 9 billion [pounds sterling] a year

* avoiding damage to morale--no one wants to work for an organisation where fraud is rife and never investigated

* accountability--tackling fraud is one aspect of public, shareholder and stakeholder accountability.

In extreme cases, fraud has led to the total collapse of companies, leading to substantial job losses, zero-value shares, pensions shortfalls, imprisonment and extreme embarrassment. If fraud is not tackled appropriately it can seriously damage the organisation's reputation and can affect the confidence of your organisation's funders, shareholders, customers and service users.

Fraud must be taken seriously and companies should have a system set up to deal with it. This includes reinforcing key messages about fraud for senior managers. It has been reported that many directors consider that the two most effective ways of preventing and detecting fraud are the normal internal controls and the internal audit (Fraud--risk and prevention, CBI).

Fraud is not only attempted by employees. It can be committed by external third parties acting independently, for example, by submitting invoices for bogus goods or services.

National Occupational Standards for Management and Leadership

This checklist has relevance to the following standards: B: Providing direction, Unit 8.


The following is based on the Audit Commission definition. Fraud is:
 "the intentional distortion of financial statements or
 other records by persons internal or external to the
 organisation which is carried out to conceal the
 misappropriation of assets or otherwise for gain".

Fraud is not just limited to the misappropriation of funds. It also includes the theft of stock or equipment or other assets, as well as, for example, false claims for payment for goods or services not delivered.

Action checklist

The following checklist will help you to spot and tackle fraud. There are two elements to tackling fraud:

* putting systems in place

* putting an anti-fraud culture in place.

Putting systems in place

1. Write a fraud strategy statement

Write guidelines to help answer questions such as:

* when does pilfering become fraud and hospitality or perks become corruption?

* can staff accept any gifts?

Without guiding principles, it is difficult for people to differentiate between what is accepted custom and practice and what is not acceptable. So, set out a strategy on financial integrity.

Try to develop a separate procedure which spells out clearly:

* who is responsible for dealing with fraud

* the stages involved in raising and dealing with a concern.

2. Set up an audit committee

Larger companies should establish an audit committee. This can be a useful way of setting the framework for fraud control. The committee should consist of senior stakeholders from a range of different departments (people who have insight into the causes of fraud and sufficient influence to make any recommended changes stick) and committee members (if your organisation has a committee).

It is recommended that smaller organisations seek professional advice.

The job of an audit committee is to:

* help to design fraud prevention measures and develop a more effective fraud prevention system

* review the organisation's anti-fraud strategy

* help to investigate examples of malpractice and suggest action when they are uncovered.

The audit committee can act as a reporting line for an organisation's internal auditor. It acts as a guiding and controlling influence, a policy and strategy forum and a vehicle for accountability.

3. Tighten up anti-fraud procedures

Poorly documented procedures contribute to fraud.

4. Make the most of information technology

Organisations often hold large amounts of information, and in particular, financial information. Fraudsters often perpetrate their crimes because one department does not know what the others are doing--this may give them the chance to carry out multiple fraud. Integrated and relational databases enable organisations to cross-reference information--internally and indeed with other organisations. Use information technology to share information and spot fraud at source. Many local authorities, for example, share information about people who claim multiple housing benefit. This has proved a highly effective weapon against fraudsters.

5. Establish procedures for an effective fraud investigation

The following is based on a good practice checklist for an effective fraud investigation:

* appoint a steering officer for the investigation

* agree the target dates and key issues

* hold steering meetings to discuss progress, agree variations and identify future targets

* identify the actions required

* consider the likely outcomes, i.e. internal disciplinary action or prosecution

* if the indications appear serious, contact the police at an early stage and get their advice.

Putting an anti-fraud culture in place

Creating the right environment to tackle fraud needs a range of initiatives, some of which are difficult to evaluate but important nonetheless. In many organisations there is a good deal of apparently trivial fraud which is accepted as the norm. Changing this perception, and changing this practice, can be difficult, and may cause some resentment.

1. Leadership from managers

Any initiative aimed at openness is only as good as its leaders. It is likely that there may be some cynicism from staff about any new approach. They may well have had experience of concerns being brushed under the carpet in the past. The message about fraud and corruption needs to come clearly from the top and be reinforced with action.

2. Make communication work

Involve your employees, listen to their sense of right and wrong. Explain what fraud is and the effect it has on their jobs and the services they provide to their customers (both internal and external).

* Make it known how seriously you treat the problem.

* If it is fraud, call it fraud when you find it.

* Use seminars, newsletters and briefing sessions to explain your commitment to tackling fraud and to report on your successes.

3. Other anti-fraud training

Any new system needs to be reinforced with training. You can use training to stress your key messages about fraud and the need for vigilance and openness and to explain the way the system works. More importantly, training can also help to instil new coaching and counselling skills that managers will need to handle concerns effectively.

4. Whistleblowing

It is important to open up routes through which concerns about fraud can be channelled. Apart from line managers, staff need the option of another route to raise their concerns. This could be the Chief Executive or finance officer, an employee in internal audit or another named senior manager in a larger business. Staff should feel able to raise their concerns, in strict confidence, without recrimination.

A final word

The measures above are suggestions. You may already do many of the things mentioned. The key is to keep a balance between the procedures and guidelines and to work at developing a feedback culture.

Managers should avoid

* brushing fraud under the carpet

* being soft on fraud

* ignoring the concerns of staff--they are the ones who are most likely to spot fraud.

Additional resources


Risky business: corruption fraud terrorism and other threats to global business, rev ed, Stuart Poole-Robb and Alan Bailey London: Kogan Page, 2003

The computer security and fraud prevention audit: an in-depth security check on your computer systems and the information they hold, Kenneth Lindup and Lance Reeve London: Financial Times Prentice Hall, 2000

Fraud risk and prevention, Confederation of British Industry and Ernst and Young London: Caspian Publishing, 2000

Fraud watch, 2nd ed, David Davies London: ABG Professional Information, 2000 This is a selection of books available for loan to members from the Management Information Centre. More information at:

Journal articles

Fighting fraud up close and personal, Kim Mills CMA Management, Feb vol 79 no 9 2006, pp18-20

Armed response, Mike Brooks Accountancy, Feb vol 137 no 1350 2006, pp45-46

Fraud and greed and the dark side of management, Vicki Jayne

Management NZ, Mar vol 50 no 2 2003, pp20-22, 24, 26, 28

This is a selection of journal articles available from the Management Information Centre. More information at:

Related checklist

Introducing a whistleblowing policy (072)


Audit Commission

1st Floor, Millbank Tower, Millbank, London SW1P 4HQ

Tel: 020 7828 1212

Institute of Internal Auditors--UK and Ireland

13 Abbeville Mews, 88 Clapham Park Road, London SW4 7BX

Tel: 020 7498 0101

Public Concern at Work

Suite 301, 16 Baldwins Gardens, London EC1N 7RJ

Tel: 020 7404 6609
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Title Annotation:Checklist 050
Publication:Chartered Management Institute: Checklists: Small Business
Geographic Code:4EUUK
Date:Jun 1, 2006
Previous Article:Writing a business plan.

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