During the last few years attention has increasingly turned to consideration of client critical business processes functioning as a unified whole as a focus of both risk assessment and fraud prevention efforts. As result of this attention has come the accompanying realization that superior design of individual business processes is not only critical to the success of the overall organization but to its fraud prevention effort as well. For example, take bid preparation, a process that is usually conducted under time pressure, and requires cross-organizational coordination involving the finance, marketing and production departments. If this process is badly designed, it may slow down processing and lead to late submission of the bid or to an inadequately organized bid, reducing the chances of winning the tender, all outcomes that increase the risk of the emergence of irregularities and perhaps even to the enhanced facilitation of actual fraud.
An additional realization has been that business processes require process based management. As CFE’s, our client organizations are usually divided into functional units (e.g., finance, marketing). Many business processes, however, like the bid process, are cross-organizational, involving several functions within the organization. A raw material purchasing process flows through the warehouse, logistics, purchasing and finance functions. Although each unit may function impeccably independently, the process may be impaired due to a lack of coordination among the units. To prevent the obvious fraud vulnerabilities related to this problem, the ACFE emphasizes the need to manage the business process fraud prevention effort end to end. This includes appointing a process owner; setting performance standards (e.g., time, quality, cost); and establishing (and risk assessing) the control, monitoring and measurement of all the processes at work.
In the modern business world, change is constantly occurring; admirable as this fact is from an innovation perspective, anything that creates change, especially rapid change, can constitute opportunity for the ethically challenged. Despite this and associated risks, to ensure its competitiveness, the organization must continuously improve and adapt its business processes. Automated processes based on information systems are usually more difficult and expensive to change than manual processes (of which there are fewer left every day). Modifications to traditional program code require time and human resources, resulting in delays and high costs. Hence, to maintain business agility, automating business processes requires a technology that supports rapid modifications and often, less management oversight and control and more vulnerability to fraud.
Any business that is successful over the long term has most likely performed some kind of risk assessment, and had some success at managing business risks. Managers of successful entities have thought out what risks could have a significant negative impact on their ability to successfully execute the business plan, or even just cause a substantial loss of business, and have attempted to provided mitigating activities to address those risks. With the pervasiveness of fraud and, more important, their increasing dependence on cross organizational business processes, entities have had to consider a fraud risk assessment as a sizeable portion of any fraud prevention effort. Yet, many entities struggle with the issue or, if convinced of the need to conduct an assessment across business process flows, with where to begin in performing an effective one.
The primary focus of a cross-organizational business process fraud risk assessment is to identify risks that the totality of such business processes present to the business, i.e., adverse effects related to these processes, whether taken as a whole or individually, are not in the best interests of the entity. These risks are usually associated with business elements such as the ability to deliver the service/product efficiently and effectively, the ability to comply with regulations or contractual obligations, the effectiveness of systems (especially accounting systems and financial reporting systems), and the effective management of the entity in general (to achieve goals and objectives, to successfully achieve the business model). Weak anti-fraud controls can introduce risks in any of these areas, and more. For instance, robust anti-fraud controls can enhance the entity’s ability to sell its products over the internet, or move costs (clerical functions) from within the entity (employees) to customers outside the entity (e.g., online banking and the need to ask questions about accounts). The bottom line is that there is a need to have an effective identification and assessment of business process risks where the risks are at a degree that is more than trivial.
Typically, fraud risk is assessed as both a probability of occurrence and a magnitude of effect, or the product of the two. The greater that product, the more significant that risk is to the entity, and the more it needs to be mitigated. Therefore, for each cross-organizational process risk, someone is asking the questions: what is the magnitude of the identified fraud risk/failure (e.g., monetary loss)? What is the likelihood of it occurring (e.g., a percentage)? One thing the CFE can do is to obtain a copy of the client’s current risk assessment document. If management does not have one, or if it is in their head, then by default, assurance over fraud risk being properly mitigated is lowered. Another good start is to obtain the client’s business model; goals, objectives and strategies; and policies and procedures documents. A review of these documents will enable the CFE to understand where cross business process fraud risks could occur.
Another thing the CFE should do is gain a good understanding of the loss prevention function (if there is one), including its managerial and operational aspects. Then, depending on the entity, there could be an extensive list of technologies or systems that will need to be evaluated for risk in operations. From the management side, it includes the internal audit and loss prevention staffs. A measure of the competency of staff devoted to the fraud prevention effort is a key factor. Obviously, the more competent the staff, the lower the risks associated with all the elements of operations they affect, and vice versa.
Since traditional systems are transaction based and handle each transaction and business document separately, it’s difficult to audit processes end to end. Therefore, in such systems proper audit trails should be designed and implemented to ensure that a chronological record of all events that have occurred is maintained. A focus on entire business processes, by contrast, is process flow based and therefore audit trails are a built-in feature. In automated systems featuring this type of inter-process flow, all incidents and steps of multi-business processes are documented and linked to each other in the order they occurred.
From the access control aspect of operations, an assessment should be made as to risk of unauthorized activities. For example, do access controls sufficiently limit access to systems and supported business process flows by effective authorization and authentication controls? Does the information management test new systems and applications thoroughly before deployment? Is there a sufficient staging area so that business process flow support applications can be tested not only on a stand-alone basis but also when interfaced with other applications and whole systems? If applications are not tested, this would lead the CFE to have less assurance about mitigating fraud risks facilitated by bugs and system failures.
The focus of fraud mitigation has moved, with increasing automation, away from the simple single fraud scenario to the entire flow of the interlocking business processes constituting the modern organization and their analytic footprint.