I have sometimes asked myself who is responsible for frauds which take place in the organisation? Is it the shareholders, is it the board, is it management or is it the staff responsible for frauds that take place in the organisation? In my view it is a shared responsibility with the board, management and staff each taking part of blame for the frauds which take place in the organisation. The board takes the blame as it is responsible for setting the right moral culture tone at the top and developing the relevant policies which guide management and staff in doing the right things. The board has also the responsibility of ensuring effective management and internal controls systems are place for effective prevention, detection and discovery of frauds. The board through its audit committee continuously gets assurance on effectiveness of management and internal control systems and also coordinates the work of both the external and internal auditors to ensure the integrity of the financial statements.
Management of the organisation on the other hand takes part of the blame as it is responsible for the implementation of the policies and development of guidelines to guide staff in the implementation of policies. Management is also responsible for the development and implementation of effective mitigation strategy for the identified areas with risk exposures.
Finally the staff are responsible for execution in accordance with the guidelines developed by management.
The three parties namely the board, management and staff are expected to live the moral values of the organisation.
Fraud therefore can only take place if either board or management or staff fail to do the right things aimed at ensuring that effective systems to prevent, detect and discover are in place and are continuously working. The following reasons for fraud taking place in organisations are mainly as result of action or lack of action by the responsible parties;
Lack of right tone from board
Fraud can take place because the board has not set a right moral tone at the top through developing the policies which will ensure frauds are effectively prevented and detected and discovered. It is at the board level where the right business culture is developed. The board is also expected to develop organisation values with mechanism to ensure they are lived by everyone in the organisation.
Weak internal controls
Frauds can also take place in an organisation because a strong internal control system to prevent, detect and discover frauds is not in place. As a result weaknesses are not promptly identified and dealt with to ensure staff alone or in collaboration with external parties do not take advantage of the weaknesses to defraud the organisation.
The attitude of management towards the existing internal control system matters. Does management like or hate controls? Is management time on internal controls spent on enhancing or eroding it?
The controls will not effectively serve the purpose for which they were intended if they are continuously being overridden by some members of the management team for personal interests. The staff are most likely to follow the immoral examples of their leaders in overriding controls for their personal interests.
Lack of effective internal check system
To ensure the internal control system is continuously operating as planned the work of one person should be independent checked by another during the course of that other’s work. There should not be one staff that carries out an activity from beginning to the end. The organisation should therefore have a system with effective segregation of duties.
The possibility of collusion
If the controls are not effective, it is possible for two or more staff to collude internally or in collaboration with external parties in carrying out a fraudulent activity for the personal benefit. The collusion of staff can be minimised if extra effort is taken in vetting new staff before they are engaged by the organisation. Fraudulent tendencies quite often developed overtime and some fraudulent tendency red flags can be identified if staff venting is properly carried out. Staff rotation and regular taking of leave is helpful in spotting fraudulent staff within the organisation.
I have been involved in investigating various types of frauds and in various organisations over time. I am always surprised that the board, management and staff do not take seriously their responsibility for preventing, detecting and discovery of frauds. Therefore in my view the directors, management team and staff are collectively responsible for frauds which take place in the organisation when they fail to live in accordance with the accepted moral values and guidelines in the area of fraud.
John Muhaise Bikalemesa
Director: Big Drum Advisory Services Limited