Prevention of Fraud Essay

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Total Length: 2387 words ( 8 double-spaced pages)

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Organization: Bank of England

Fraud is intentionally deceiving a person such that he or she incurs a loss and the fraudulent person makes a gain. Instances of fraud can include misappropriation of funds or assets, inappropriate expenditures, fraudulent financial reporting etc. (Stephanie, 2008). A recent FBI statistic explores the extent of fraud in non-profit organizations. In its report, the FBI alleged that approximately 2,300 websites that solicited help for victims of Hurricane Katrina were in fact fraudulent (Aviv, n.d). Therefore, banks in general, and bank of England in particular, need to be cautious of such organizations. The best way to achieve that is to have clear cut policy and understand operating procedures with regards to dealing with the non-profit sector.

The occurrence of fraud often costs non-profits a lot. They not only lose money but make a huge dent in their reputation due to the bad publicity that such activities attract. Their credibility and reputation take a huge hit. Also, the bad publicity will certainly reduce their capability to raise funds in the future. Where law suits are involved, the organization often finds itself in the public eye for a long time. While it is rarely mentioned, the staff and boards of these organizations are often hugely disrupted by such occurrences. In a charity situation, one dollar fraudulently lost leads to an equal amount being unavailable for its charitable activities. Further, more money will have to be spent in correcting the situation and covering legal costs. Recently, in a church fraud case involving a Pennsylvanian Lutheran Church, the amounts incurred during the first 30 days of the fraud's investigation was $100,000. The cost of lacking controls to curb fraud cost this church a lot of money. The Bank of England can learn from this and institute proper internal controls to curb any fraudulent activities that might be engineered by insiders. Bad publicity is harmful to institutions that are held in high regard by the public such as central banks. A fraud in the central bank might send shivers to the stock market and this might lead to investors losing money. The bank has the resources to institute proper internal control measures including developing good information systems and hiring personnel like internal auditors.

Weak internal controls and a lack of measures to check on the activities of an organization's staff creates an environment that fraud can thrive in. The fraudulent activities that might take place include: (a) inflated or unwarranted personnel expenses like wages, benefits and travel costs, (b) false payments to 'ghost' workers, (c) false expenses not incurred in the running of the organization, and (d) colluding with suppliers to over-bill (McMillan n.d.). How employees rationalize their actions will therefore widely vary. They could be disgruntled workers that think of fraud as compensating for the wrongs that the organization has done to them. They could be the staff that thinks they are deserving of higher remuneration. Or they could be assisting other people who are in financial need. These rationalizations and justifications are bound to be numerous since motivations for humans are pretty complex. The Bank of England should therefore take the time to understand their employees. There should be open and clear communication channels that allow employees to share how they feel and the troubles they are currently undergoing. Remuneration should also be fair to ensure that no employees feel unappreciated and taken advantage of (DeLucia, 2008).

The range of fraudulent activities is vast (Audit report n.d) It may suck into it people of high profiles like top executives as was the case in Enron, Tyco, WorldCom and Adelphia Communications and others like high ranking officials in government, investment bankers and sportsmen (Hemphill, 2003). A charity organization in California had its CFO arrested in August 2008 as he was alleged to have embezzled approximately four million dollars from the organization. The funds were allegedly invested in the stock market. Due to uncertainties of the stock market especially because of the unforeseen crisis in the oil sector and sub-prime lending, there were huge losses incurred. With proper measures, the Bank of England can ensure that no employees, even the high ranking ones, do not have powers to access and withdraw funds without the knowledge of other workers in the organization. There should be at least two signatories for every withdrawal and use of funds should be transparently accounted for. Any project that an employee of the bank takes to further the mission of the bank should first go through the required approval procedures before being given the green light (DeLucia, 2008).

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Employees should be educated on the place of ethics in the workplace. A whistleblower protection policy should be instituted so that employees are able to report any fraudulent activities without fear of being victimized. The Bank of England can begin by sending a memo to its employees. The memo should clearly define fraud and give examples of fraud. They should then encourage employees to provide feedback on the contents of the memo. By doing this, the Bank of England shall have educated the employees and communicated their intolerance to fraud to all employees (DeLucia, 2008).

Public organizations like the Bank of England can always do more to help tackle this vice. Information sharing between the various departments has to improve. Since barriers in the organization hinder the fraud detection and speedy resolutions, they should be done away with. Such barriers only serve to prolong the problem. The public sector should borrow a leaf from the private sector in the handling of fraud. The private sector always detects fraud fast and almost immediately they occur and the top management is informed immediately. The organizations freely share data and so strategies for fraud detection continuously get better. This should also be done in the public sector. The State of the State 2012, a Deloitte report indicated that adopting private sector policies in fraud detection could help the public sector save up to £8.5 billion every year. To minimize debt loses, the public sector, particularly the Bank of England, should be more proactive in collecting debts owed and manage its funds properly (Cullen, 2012).

Fraud Perpetration and the Impact on Consumers

Fraud in all its many forms from misrepresentation to personification is still a big challenge in the financial services sector. Frequency of fraudulent activities is increasing by the day and the complexities of their perpetration are becoming even more elaborate and ingenious. Economic problems like unemployment, business closures and pay freezes have also contributed to the rise in fraud cases. CRIF studies in Italy revealed that only a measly 19% of fraudsters who engaged in identity theft and credit fraud were reported to the police. On identification of the fraudsters, it was realized that 42% of them were shop keepers or traders while 23.7% of them were related to the victim. There has been a recorded decline in fraud cases perpetrated by acquaintances and friends but the number is still high at 19.1% of all cases. Fraud involving former employees or business partner has grown and now stands at 7.6% of all cases. The length of time it takes to detect a fraud has increased from last year. 40% of the victims of fraud made the realization after two years following the taking out of the credit while in 2009 the number was slightly above 25%. However, credit fraud detection in cases no older than 6 months dropped and now represents 24% of the total. Most people only became aware that they were victims of fraud after the credit facility contacted them (40%) or when they tried to get credit themselves (11%). Another 11.5% detected the fraud following the checking of their bank statements. To prevent such kind of fraud, the Bank of England can put in measures that would limit personification and identity theft. There are several technologies like the use of biometrics that can ensure that personification is avoided. Storage of employee details should be highly safeguarded to ensure that no unauthorized person authorizes a transaction using the details of another employee (Fraud Prevention and Data Protection, n.d.).

Preventing and Fighting Fraudsters

An organization needs multiple steps to fight fraud. Steps should be taken to prevent fraud. In a situation where that cannot be achieved, the Bank of England or any other organization must have appropriate systems that will help detect fraud as soon as it is perpetrated. Banks should ensure that they can verify whether the documents used at any stage of a transaction are genuine or not. They should be able to know whether the applicant's details are correct or whether the business entity is operating. The Bank of England can institute systems to detect any attempts at fraud. Databases should be robust but lawful and also draw from other databases outside the organization where possible (Fraud Prevention and Data Protection, n.d.).

Four Priorities for Tackling Public Sector Fraudsters

Collaboration - the public sector must remove silos. All public sector organizations must collaborate and share….....

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