Fraud is a serious threat facing every company in its operations. Fraud in organizations is classified into three main categories: intentional misrepresentation of financial information; misuse of tangible and intangible resources of an organization and corruption (Đorđević & Đukić, 2015). The specific activities which constitute fraud in organizations include concealment of information, forgery, misuse of funds and bribery. Fraud is conducted by people in organizations to secure a wide range of personal interests including avoiding payment, to obtain property or money and to gain a business advantage. Fraud in organizations can lead to various risks including financial loss, loss of business, distortion of labor activities and negative business reputation. Despite the risks, fraud is common in organizations and is associated with one of the major sources of costs of operations. The mechanisms to deal with the problem of fraud in Dingwow Inc. should consider the nature of operations, the organizational culture, and the recommended professional standards and regulations.
The process of preventing fraud involves identifying the key factors or conditions that influence the probability of fraud. The process should consider the people in an organization at all the hieratical levels, as well as external actors. These external actors may include customers, suppliers and service providers. There are three key factors referred to as “the Triangle of Fraud” which determine the probability of fraud (Đorđević & Đukić, 2015, p. 298). The first condition is the existence of stimulus or pressure. Monetary gain is the most common stimulus for people to commit fraud, and this can affect people at all hieratical levels in an organization. However, people can also commit fraud to protect their position or gain some advantage over others. The second factor is the availability of opportunities to commit fraud. Various circumstances may create or limit opportunities to commit fraud. The position of an individual in an organization may influence the ability to commit certain crimes. The employees at the higher levels of management may have many opportunities to commit fraud because of their power to access and control the use of resources. The process of crime prevention should identify the people and processes that create opportunities for people to commit crime. The third factor is the possibility for the person to rationalize actions leading to fraud. People may be influenced to commit fraud if there are chances of justification. This is mostly concerned with decisions made by people in management as part of business operations, but which are aimed at advancing personal interests (Đorđević & Đukić, 2015). Crime prevention should consider the personal interests of people which may influence the decisions they make in their role. Fraud rationalization is common in cases of conflict of interests in which there is need to advance both personal and organizational interests.
Internal audit mechanisms are the highest cost-benefit factor for Dingwow Inc. because it can deal will all aspects of fraud. According to Đorđević & Đukić (2015), companies are increasingly relying on internal audit to deal with the problem of fraud because it is the function involved with adding value by monitoring processes and activities. Internal auditing provides the objective assurance that internal fraud mechanisms are sufficient and working as required. Internal auditing should conduct comprehensive reviews on fraud identification, detection and prevention mechanisms on regular basis so as to include emerging forms of fraud related operations (Biegelman & Bartow, 2006). Proper implementation of internal audit and control mechanisms can prevent or detect fraud by both internal and external actors.
The management should develop a strong organizational culture against fraud as one way of facilitating internal audit mechanisms. Organizational culture on fraud can be created by establishing a policy of zero-tolerance against fraudulent operations, encouraging whistleblowing and providing effective mechanism for accountability and punishment (The Institute of Internal Auditors, 2009). The organizational policy should make it clear to all the stakeholders that fraudulent operations are not allowed. The conduct of internal actors in an organization can discourage the external actors from fraud. The management should create effective channels of communication to report fraud. Whistleblowers are important sources of information, and the organizational culture can encourage or discourage reporting. There should be mechanism for accountability to prevent misuse of positions and resources to commit fraud. There should be clear definition of responsibilities so that people can be held accountable to cases of fraud which involve omission or commission of various issues in business operations (Biegelman & Bartow, 2006). The corporate culture should encourage general awareness about fraud in all business operations. The ethics committee has the responsibility of developing standards on expected code of conduct and ensure that employees at all levels are aware of potential sources of fraud and how to avoid getting involved (The Institute of Internal Auditors, 2009).
Besides, the management should ensure that the internal auditing functions are provided with the necessary resources including personnel and tools of detecting fraud. The management should also be proactive in ensuring the effectiveness of the internal audit mechanisms. The AICPA proposes continuous improvement of skills by internal auditors through training (The Institute of Internal Auditors, 2009). The internal auditing mechanism should be aligned with incorporate mechanisms, best standards and legal regulations. The nature of risks of fraud depends on the nature and operations of a company. The business nature of Dingwow Inc should be considered in identifying the most potential risks to the company. The best standards indicate industry recommendations on fraud detection and prevention. The internal audit should consider the standards recommend by professional and regulatory agencies when formulating the internal control mechanisms (Biegelman & Bartow, 2006).
Thus, various steps can be used to develop a system to deal with fraud in organizations. Dingwow Inc. should focus on the internal mechanisms as the basic and most important step in detecting and preventing fraud. The effectiveness of the internal mechanism is influenced by organizational culture towards fraud. The management should encourage accountability, fraud awareness and development of internal audit mechanisms.
- Biegelman, M. & Bartow, J. (2006). Executive roadmap to fraud prevention and internal control: Creating a culture of compliance. Hoboken, N.J: Wiley.
- Đorđević, M. & Đukić, T. (2015). Contribution of internal audit in the fight against fraud. Series: Economics and Organization, 12(4), 297-309.
- The Institute of Internal Auditors. (2009). Internal auditing and fraud. Retrieved from http://www.kcgaudit.co.uk/wp-content/uploads/2016/01/internal_auditing_and_fraud.pdf