Page 30 - IIA MAGAZINE_March 2017_English

Fraud Risk
BY KHALID MOUSA
The Risk of Fraud and
the Role of Internal Audit
Fraud is one of the challenges that face dif-
ferent organizations and sectors. It hinders
performance, wastes money and scarce
resources, and inflicts damages on the
organization, its reputation and its compet-
itiveness. This damage is not restricted to
financial losses; it may take other forms as
well. It could be a loss in the organization’s
performance, its reputation and credibility,
and the trust of its investors, which render
the organization exposed to many risks.
The different stakeholders expect that the
management of the organization would
manage this risk by developing programs
to combat the risk of fraud.
Companies nowadays face the risk of fraud
more than any time before as a result of
the economic instability, the increasing
reliance on information technology and
transactional complexity, leading to the ex-
istence of pressures, opportunities and jus-
tifications for fraud. These three elements
constitute the basis of the risk of fraud.
30 INTERNAL AUDITOR - MIDDLE EAST
Pressures/
incentives
Fraud
Risk
Opportunities Attitudes &
justifications
The updated Internal Control - Integrat-
ed Framework issued by Committee of
Sponsoring Organizations (COSO) of the
Treadway Commission in May 2013 placed
emphasis on some points that might be of
help to the management in the effective de-
sign and implementation of internal control
such as fraud risk considerations, which
must be evaluated by the internal audit as a
part of the internal control.
There is increased recognition by the
authorities, boards of directors, audit
committees and stakeholders of the effec-
tive role of internal audit in drawing the
attention of the stakeholders to the risk of
fraud. Therefore, internal auditors are now
required to help organizations in reducing
the risk of fraud through the examination
and evaluation of the control methods, the
role of the organization in the management
of the risk of fraud and how effective and
sufficient they are. The findings of the
ACFE report of 2016 pointed out that the
internal audit departments in organizations
have played an important role in the detec-
tion of embezzlement, misuse of assets and
corruption. The cases of fraud detected by
internal auditors represent 16.5% vs. 3.8%
detected by external auditors for the total
cases detected in 2016.
The International Standards for the
Professional Practice of Internal Auditing
have adopted a development for the role
of internal audit in organizations through
the provision of an evidence that the
organization’s management deals efficiently
and effectively with the fraud risk, and an
evaluation of the management’s responses
to fraud risk within the levels acceptable
and approved by the Boards of Directors,
through the Performance Standards which
provided for the role of internal audit in
the evaluation of the management of the
fraud risk in Standard No. 2120.A2, “The
internal audit activity must evaluate the
potential for the occurrence of fraud and
how the organization manages fraud risk.”
The Standards also clarified the role of
the chief audit executive to report to the
senior management about the fraud risk
in Standard No. 2060, “The chief audit
executive must report periodically to senior
management and the board on the internal
audit activity’s purpose, authority, responsi-
bility, and performance relative to its plan.
Reporting must also include significant
risk exposures and control issues, including
fraud risks, governance issues, and other
matters needed or requested by senior
management and/or the board.”
Furthermore, the Standards included the
attributes necessary for internal auditors
through the Attribute Standard No. 1210.
A2 which reads “Internal auditors must
have sufficient knowledge to evaluate the
risk of fraud and the manner in which
it is managed by the organization, but
are not expected to have the expertise of
a person whose primary responsibility is
detecting and investigating fraud.”
MARCH 2017