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Article Author:

Benefits of Conducting a Fraud Risk Assessment — Part One

 

Fraud is a risk to every organization whether large or small. Organizations should periodically assess their potential exposure to fraud and determine if their exposure is mitigated through their internal controls. As auditors, we are often asked: (1) what is involved in a fraud risk assessment and (2) how an organization should conduct a fraud risk assessment. In Part One of this series, we will explain what a fraud risk assessment is and the benefits of conducting a fraud risk assessment. In Part Two and Part Three, we will discuss how to plan, execute, and assess the results of a fraud risk assessment. 

What Is a Fraud Risk Assessment?

A fraud risk assessment is a tool that is used by an organization to systematically identify where and how fraud may occur and who may be in a position to commit fraud. This tool drives an organization to identify fraud risk schemes as well as respective controls that may prevent or detect these schemes. Additionally, a fraud risk assessment will measure the detective or preventative controls to ensure they are designed and operating effectively.

An effective fraud risk assessment process:

• Requires board input and oversight 
• Is performed on a systematic and recurring basis
• Identifies instances where fraud may occur within the organization
• Involves appropriate personnel to consider relevant potential fraud schemes and scenarios
• Links potential fraud schemes and scenarios to mitigating controls

Who Is Involved in Performing the Fraud Risk Assessment?

Fraud risk assessments are the responsibility of the entire organization, including the board of directors. Oftentimes, the CFO is assigned the responsibility to oversee a fraud risk assessment because many fraud schemes relate to finance activities. While the CFO may take the lead in conducting the fraud risk assessment, cooperation is needed across the entire organization. Specialists are often used to help with the assessment and can be a valuable resource in gathering and organizing information obtained during the process.

What Are the Benefits of Conducting a Fraud Risk Assessment?

If planned and executed properly, fraud risk assessments can accomplish the following objectives:

• Identify specific instances of fraud within the organization
• Address and detect fraud risk proactively rather than reactively
• Deter potential fraud perpetrators through its existence and communication to executives and employees
• Centralize the organization by actively discussing and monitoring risk and controls

By conducting a fraud risk assessment, organizations will be able to improve their internal controls and mitigate the potential risk of fraudulent activity. In Part Two, we will explore the planning and execution of a fraud risk assessment.

For further information please contact Chris Cutrara, Senior Manager, at ccutrara@BlackmanKallick.com or 312-980-3341 or your Blackman Kallick representative.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.