In the modern-day and age, it is increasingly important for the management to have strong internal controls to mitigate the overall risk of fraud or errors within the company.
Managers need to have a foolproof strategy to ensure that their controls and SOPs (Standard Operating Procedures) do not impose any inherent risk because it might inevitably lead to significant financial losses, which might hamper the organization’s overall reputation.
To understand Management Responsibilities related to fraud, certain areas need to be discussed:
- How can managers prevent fraud?
- What should the managers do once fraud is detected?
- How can managers prevent fraud?
Preventing fraud in an organization requires proper controls, detecting any material misstatements within the financial statements.
Managers are responsible for having a clear-cut strategy regarding preventing fraudulent activities, which needs to be communicated to the other team members.
Intentional misstatement in financial statements is a criminal activity. Therefore, this should be communicated properly with all the team members, and organizations should ideally have a zero-tolerance policy towards any activities like this.
Furthermore, they should also have SOPs designed to ensure that the incentive to cheat or commit fraud does not exist.
The role of internal auditors in this regard is also very crucial. Having a proper internal audit department ensures that the organization has a procedure and policy to check for any discrepancies and material misstatements perpetually.
Internal Risk assessment is also an important strategy in this aspect. Identifying all the inherent risk procedures and protocols might be a preventive measure to reduce the overall risk.
However, regardless of having all such policies and practices in place, there are still some instances where fraud is committed, resulting in severe financial losses and the inevitable loss of repute for the corporation.
What should the managers do once fraud is detected?
Once fraud is a detective, the immediate course of action is for the managers to ensure that damage control is done on a timely basis.
The people accountable for the fraud should immediately be laid off, and there should be zero tolerance for anyone remotely involved in the process.
Furthermore, it is always fundamental to have a Fraud Response Plan if any fraudulent activity is detected at the organization.
This Response Plan lays down certain rules and to-dos that can be a viable strategy for the management, following the detection.
The reasonable steps, as mentioned earlier, can include some or all of the following strategies, given below:
- Clear reporting mechanisms
- A thorough investigation
- Disciplining of the individuals responsible
- Recovery of stolen funds or property
- Modification of the anti-fraud strategy to prevent similar behavior in the future.
Conclusively, organizations need to have a documented plan to respond to suspected or detected fraud cases.
In this regard, a fraud response plan should include a clear statement on the corporate policy about dealing with fraud. Furthermore, it should set out the roles and responsibilities of all those involved in responding to suspicions.
Moreover, it should also provide a framework regarding how an investigation should ideally be handled, further ensuring that due process is followed and the integrity of evidence is maintained.