Targeting Fraud through New Task Forces

In an effort to detect and analyze fraud, the SEC announced recently that is has established three new task forces within the Division of Enforcement to aid in investigations. The new task forces will each have specialized jobs that relate to different aspects of financial fraud.

Center of Risk and Quantitative Analytics (CRQA)

The CRQA is the data and analysis center of the Division of Enforcement. The main focus of the division is to identify risks that could harm investors, and monitor for financial transgressions.  The Division of Enforcement uses the CRQA as a resource that supports investigations through data analysis and risk assessment.

Financial Reporting and Audit Task Force

The Financial and Audit Task Force will help in the detection and prosecution of fraudulent financial reporting. The effort to expand enforcement, the task force will work to detect fraudulent financial statements, issuer reports, and audit failures. Enforcement lawyers and accountants will work to find and identify, through ongoing reviews and performance trends, areas susceptible to fraud.

The Microcap Fraud Task Force

The Microcap Fraud Task Force will focus on microcap securities. The SEC says that microcap securities are most often connected with fraudulent and manipulative strategies to accumulate gains. These small companies do not always report financials to the public and so the SEC wants to concentrate on them to help keep fraud from happening.  This task force will work with the Microcap Fraud Group that formed in 2010, but will not replace them.

Each task force will work to prevent fraud and audit misconduct while working on strategies to improve systems for identifying fraud and improving how audits are conducted.


How to Reduce Internal Fraud

In all businesses, having effective internal controls is very valuable. How do you know that your practices are effective? What can you as a business owner do to deter fraud in your business? Having effective internal controls will help your business keep up with the fast pace of the changing business practices. The following questions can help companies examine their internal controls to help prevent fraud.

Which businesses need to protect themselves against fraud?

No company, big or small, is immune to fraud. All the companies that have experienced fraud have one thing in common: they did not think that they were susceptible to fraud.

Businesses, especially smaller businesses, require employees to perform multiple tasks are at a greater risk of internal fraud. Businesses that cannot separate “conflicting tasks” increase the chance of fraud. When these tasks are separated, perpetrators are required to work together to steal from the company, which is harder to do then a single person doing all the tasks.

In larger business with more staff, tasks are separate, but perpetrators will still look for loopholes in the system. When owners are lax with monitoring, and given the opportunity weaknesses are exploited.

What Condition Motivates Internal Fraud?

When a perpetrator meets poorly designed and monitored internal controls, fraud happens. Companies should work to design proper controls, and be attentive in monitoring their effectiveness. The controls should be adapted to changing practices in the business, and not be ignored when the business becomes too busy to implement them. Owners need to be aware of internal controls and make them propriety to deter employees who might commit fraud.

How Can Companies Prevent Internal Fraud?

To help reduce the chances for fraud, companies must take a “top down” approach. Modeling and exhibiting the greatest degree of integrity set the tone for the company. Owners that do not uphold any level of integrity with aspects of the company cannot expect their employees to do so either.

When assessing controls, companies should identify areas with the biggest risk. Implement controls to shore up vulnerabilities uncovered in the assessment. Have a certified CPA audit financial records and procedures to determine where weaknesses are in the company. If the CPA specializes in fraud, this is especially helpful in determining what controls should be implemented to prevent fraud. Controls should be monitored and review regularly to truly reduce the likelihood of fraud.

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