Question

WEEK 6 DISCUSSION 3

ANSWER TWO OF THE FOLLOWING QUESTIONS:

1: Why is it important for security leaders to understand their organization's budgeting and financial processes?

2: How does security deter and detect internal fraud in an organization?

3: The goals of all corporations are profits. How does a security work with this fact given that it's usually a cost center?

Answer 1

1: Why is it important for security leaders to understand their organization's budgeting and financial processes?

Budgeting plays an important role to achieve the objective of the organization by utilizing available resources efficiently. With the help of a budget plan, it is easy to do the financial analysis that you have enough money to do things that you have planned to do.

The first step in managing a budget is knowing what services the funds will have to support. This may seem simplistic, but it is a step many security leaders cannot complete without a great deal of thought and research. Being new to the position is one common reason for this difficulty, but there are others. When security programs grow organically over time, it can be hard to keep track of added services without concentrated and continued effort. The same may be true when security leaders must quickly develop their programs based on what is required by regulators or management to provide.

Security and risk management operates across other business functions up and down the organization. It is a complex function, and in many companies large and small, security’s work extends well beyond the barriers of “security.” Because of this, cataloging services can be challenging, but all the more necessary. If the security leader cannot point to a file, document or presentation that clearly states exactly what the function is doing, the rest of the business will not fully appreciate the breadth of services offered.

Once services are cataloged, the question becomes “What do these services cost?” How many full-time employees and contract staff are dedicated to each service? Is there staff outside the department that participates as well? How many hours do they spend on that part of their duties? What technical or material resources does the service require, what does upkeep and maintenance cost, and what is the price of purchase or planned replacement (both within and outside the department)?

Gathering all of this information will take a time commitment. Staff members and non-security colleagues may need to be brought in to share input and contribute data, but some of this task can likely be done by going through existing records and brainstorming. For many security leaders, the heavy lifting actually starts with the next step.

Budgeting plays an important role to achieve the objective of the organization by utilizing available resources efficiently. With the help of a budget plan, it is easy to do the financial analysis that you have enough money to do things that you have planned to do.

A strong budgeting plan improves performance evaluation and provides useful insights for decisions making. However, creating an efficient budgeting plan is not as easy as you think. You need to spend a lot of efforts to make it better and consider useful budgeting tips such as calculating revenue versus expenditures, taking into account seasonal fluctuations and check cash flow regularly, etc.

Following are some advantages of budgeting:

• It defines the objectives of a business for a specific period.
• It forces managers to do better forecasting as they have to put their predictions into forecasts.
• It is important to create business plans.
• Budgeting helps to make capital and revenue resources profitable.
• It helps in controlling income and expenditure of a business.
• It allows you to save for expected and unexpected costs.
• Efficient budgeting plan creates an environment of earning profits throughout the business.
• Through budget control, every problem in the organization solves with a systematic and disciplined approach.
• The foremost thing of budgeting is, it leads to discipline in the organization which is important for managerial responsibility.

The goals of all corporations are profits. How does a security work with this fact given that it's usually a cost center?

2: How does security deter and detect internal fraud in an organization?

Employee fraud is a significant problem faced by organizations of all types, sizes, locations, and industries. While we would all like to believe our employees are loyal and working for the benefit of the organization (and most of them probably are), there are still many reasons why your employees may commit fraud and several ways in which they might do it.

Types of Business Fraud

Fraud comes in many forms but can be broken down into three categories: asset misappropriation, corruption, and financial statement fraud. Asset misappropriation, although least costly, made up 90% of all fraud cases studied. These are schemes in which an employee steals or exploits its organization’s resources. Examples of asset misappropriation are stealing cash before or after it has been recorded, making false expense reimbursement claims, and/or taking non-cash assets of the organization.

• Financial statement fraud comprised less than five percent of cases but caused the most median loss. These are schemes that involve omitting or intentionally misstating information in the company’s financial reports. This can be in the form of fictitious revenues, hidden liabilities or inflated assets.
• Corruption fell in the middle and made up less than one-third of cases. Corruption schemes happen when employees use their influence in business transactions for their benefit while violating their duty to the employer. Examples of corruption are bribery, extortion, and conflict of interest.

Fraud Prevention

It is vital to an organization, large or small, to have a fraud prevention plan in place. The fraud cases studied in the ACFE 2014 Report revealed that the fraudulent activities studied lasted an average of 18 months before being detected. Imagine the type of loss your company could suffer with an employee committing fraud for a year and a half. Luckily, there are ways you can minimize fraud occurrences by implementing different procedures and controls.

1. Know Your Employees

Fraud perpetrators often display behavioral traits that can indicate the intention to commit fraud. Observing and listening to employees can help you identify potential fraud risk. It is important for management to be involved with their employees and take time to get to know them. Often, an attitude change can clue you into a risk. This can also reveal internal issues that need to be addressed. For example, if an employee feels a lack of appreciation from the business owner or anger at their boss, this could lead him or her to commit fraud as a way of revenge. Any attitude change should cause you to pay close attention to that employee. This may not only minimize a loss from fraud but can make the organization a better, more efficient place with happier employees. Listening to employees may also reveal other clues. Consider an employee who has worked for your company for 15 years that is now working 65 hours a week instead of 40 because two co-workers were laid off. A discussion with the employee reveals that in addition to his new, heavier workload, his brother lost his job and his family has moved into the employee’s house. This could be a signal of potential fraud risk. Very often and unfortunately, it’s the employee you least expect that commits the crime. It is imperative to know your employees and engage them in conversation.

2. Make Employees Aware/Set Up Reporting System

Awareness affects all employees. Everyone within the organization should be aware of the fraud risk policy including types of fraud and the consequences associated with them. Those who are planning to commit fraud will know that management is watching and will hopefully be deterred by this. Honest employees who are not tempted to commit fraud will also be made aware of possible signs of fraud or theft. These employees are assets in the fight against fraud. According to the ACFE 2014 Report, most occupational fraud (over 40%) is detected because of a tip. While most tips come from employees of the organization, other important sources of tips are customers, vendors, competitors, and acquaintances of the fraudster. Since many employees are hesitant to report incidents to their employers, consider setting up an anonymous reporting system. Employees can report fraudulent activity through a website keeping their identity safe or by using a tip hotline.

3. Implement Internal Controls

Internal controls are the plans and/or programs implemented to safeguard your company’s assets, ensure the integrity of its accounting records, and deter and detect fraud and theft. Segregation of duties is an important component of internal control that can reduce the risk of fraud from occurring. For example, a retail store has one cash register employee, one salesperson, and one manager. The cash and check register receipts should be tallied by one employee while another prepares the deposit slip and the third brings the deposit to the bank. This can help reveal any discrepancies in the collections.

Documentation is another internal control that can help reduce fraud. Consider the example above; if sales receipts and preparation of the bank deposit are documented in the books, the business owner can look at the documentation daily or weekly to verify that the receipts were deposited into the bank. In addition, make sure all checks, purchase orders and invoices are numbered consecutively. Use “for deposit only” stamps on all incoming checks, require two signatures on checks above a specified dollar amount and avoid using a signature stamp. Also, be alert to new vendors as billing-scheme embezzlers setup and make payments to fictitious vendors, usually mailed to a P.O. Box.

Internal control programs should be monitored and revised on a consistent basis to ensure they are effective and current with technological and other advances. If you do not have an internal control process or fraud prevention program in place, then you should hire a professional with experience in this area. An expert will analyze the company’s policies and procedures, recommend appropriate programs and assist with implementation.

4. Monitor Vacation Balances

You might be impressed by the employees who haven’t missed a day of work in years. While these may sound like loyal employees, it could be a sign that these employees have something to hide and are worried that someone will detect their fraud if they were out of the office for some time. It is also a good idea to rotate employees to various jobs within a company. This may also reveal fraudulent activity as it allows a second employee to review the activities of the first.

5. Hire Experts

Certified Fraud Examiners (CFE), Certified Public Accountants (CPA) and CPAs who are Certified in Financial Forensics (CFF) can help you in establishing antifraud policies and procedures. These professionals can provide a wide range of services from complete internal control audits and forensic analysis to general and basic consultations.

6. Live the Corporate Culture

A positive work environment can prevent employee fraud and theft. There should be a clear organizational structure, written policies and procedures and fair employment practices. An open-door policy can also provide a great fraud prevention system as it gives employees open lines of communication with management. Business owners and senior management should lead by example and hold every employee accountable for their actions, regardless of position.

Fraud Detection

In addition to prevention strategies, you should also have detection methods in place and make them visible to the employees. According to Managing the Business Risk of Fraud: A Practical Guide, published by Association of Certified Fraud Examiners (ACFE), the visibility of these controls acts as one of the best deterrents to fraudulent behavior. It is important to continuously monitor and update your fraud detection strategies to ensure they are effective. Detection plans usually occur during the regularly scheduled business day. These plans take external information into consideration to link with internal data. The results of your fraud detection plans should enhance your prevention controls. It is important to document your fraud detection strategies including the individuals or teams responsible for each task. Once the final fraud detection plan has been finalized, all employees should be made aware of the plan and how it will be implemented. Communicating this to employees is a prevention method in itself. Knowing the company is watching and will take disciplinary action can hinder employees’ plans to commit fraud.

Conclusion

Those who are willing to commit fraud do not discriminate. It can happen in large or small companies across various industries and geographic locations. Occupational fraud can result in huge financial loss, legal costs, and ruined reputations that can ultimately lead to the downfall of an organization. Having the proper plans in place can significantly reduce fraudulent activities from occurring or cut losses if a fraud already occurred. Making the company policy known to employees is one of the best ways to deter fraudulent behavior. Following through with the policy and enforcing the noted steps and consequences when someone is caught is crucial to preventing fraud. The cost of trying to prevent fraud is less expensive to a business than the cost of the fraud that gets committed.