Board vigilance on heightened risk of fraud as cost-of-living crisis bites urges Chartered Institute of Internal Auditors
In this challenging economic climate, with the Covid-19 pandemic, the war in Ukraine, rising inflation (which has now exceeded 9%), and the cost-of-living crisis growing by the day, the opportunities and motivation to commit fraud are increasing significantly. Most notably, we are now in an “ideal environment for fraudulent activity” for all industries. Therefore, now more than ever, boards need to be extra vigilant to the heightened risk of fraud.
In this context, the Chartered IIA’s latest thought-leadership report ‘Fraud is on the rise: step up to the challenge’ urges company directors to raise their game in relation to fraud prevention and detection. This includes seeking independent assurance from their internal audit functions that their internal controls to prevent and detect fraud are robust and working effectively.
The launch of the Chartered IIA report is set against a backdrop of a series of high-profile corporate collapses in recent years that have been directly linked to fraud: including Carillion in 2018, Patisserie Valerie in 2019 and Wirecard in 2020. These corporate failures underline the devastating impact fraud can have, inflicting grave financial and reputational damage, and bringing entire companies to their knees.
In response to these fraud-related corporate failures following a number of independent reviews, the UK government published a white paper on ‘Restoring trust in audit and corporate governance’ released last year which outlined several proposals that are specifically aimed at preventing fraud. The proposals put increased emphasis on the responsibilities of company directors in relation to preventing and detecting fraud. With the government now firmly committed to publishing a draft Audit Reform Bill within the next twelve months, along with a beefed-up UK Corporate Governance Code now on the cards.
With fraud on the increase, boards must re-evaluate how they manage and communicate this risk. The report makes several recommendations for boards and internal audit, including:
- Both boards and internal audit functions must take a more proactive role in the fight against fraud, particularly during the current period of heightened volatility and uncertainty which is increasing the motivation, opportunity, and rationalisation to commit fraud (also known as the ‘fraud triangle’).
- Boards should ensure that their organisations are conducting regular and thorough fraud risk assessments that take account of the internal and external factors impacting the business.
- Boards and senior management have a vital role in developing a strong fraud awareness and prevention culture within organisations, underpinned by the right tone from the top. Internal audit can support this by helping to raise awareness around fraud and acting as a trusted advisor on areas that need improvement.
- Boards and internal audit functions must act now to prepare for the increased scrutiny and accountability on fraud from the government, regulators, and the public. Given the forthcoming draft Audit Reform Bill, they should proactively look out for and prepare for new rules and regulations on fraud that are coming down the track.
To respond to the rising tide of fraud, it is therefore imperative that boards and senior management act now to strengthen their fraud defences. This must include reviewing and then strengthening their anti-fraud internal control framework. Boards should also feel empowered to harness the skills of their internal audit functions to get comfort that the risk of fraud is being identified, managed, and mitigated effectively.
The full report ‘Fraud is on the rise: step up to the challenge’ is now available to download here.
Written by Gavin Hayes, Head of Policy and External Affairs at the Chartered Institute of Internal Auditors.
Related post: Mitigating Fraud Risk in the Wake of a Global Pandemic
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