Control Self-Assessment – A Tool for Fraud Prevention

pumpkin-pie-4That control self-assessment (CSA) can be used as an effective facilitation tool to develop fraud risk assessments is, I’m sure, of no surprise to many of the readers of this blog.  But, for those of you who are not so aware … typically, a control self-assessment session to identify fraud risk is a facilitated meeting of managerial and operational staff (the business process experts) coming together to openly discuss fraud risk prevention objectives related to identified risk factors associated with one or more of a company’s business processes.

Fraud prevention objectives for the business process are identified during the session, as well as obstacles impeding the success of those objectives.  Finally, the team formally suggests, for upper management consideration, ways to overcome identified obstacles and a proposed corrective action plan is prepared.  At the start of the self-assessment session, the participants adopt a Team Operating Agreement to ensure that an open and honest discussion takes place in a threat free environment.  It takes a consensus of the participants to approve the operating agreement which all the participants in the session sign; no management decisions regarding actions to be taken are made during the session.

After the Operating Team Agreement is in place, team members typically develop and approve what they perceive to be a list of fraud prevention objectives for the target business process under discussion.  Once the anti-fraud objectives are defined, the participants enter into a discussion (and develop a list) of what they feel to be the existing overall fraud prevention strengths of the subject process.  Next, the team discusses and develops a list of the hindrances currently preventing the process from achieving its anti-fraud related objectives.  Finally, the team develops recommendations for overcoming the identified hindrances.  Sometimes the team ranks its fraud reduction recommendations by order of importance but this step is not critical.

A CSA for fraud prevention is akin to a risk assessment brainstorming session.  For example, the scope of such a session regarding a financial reporting related business process might be tailored to the risks of financial statement fraud and misstatement as well as to the issue of management override of controls over financial statement reporting.  The objective of the CSA is for the team to identify and discuss fraud risks, fraud scenarios and mitigating controls followed by the preparation of a set of recommendations for referral to management.

For each risk factor identified the CSA team should:

–try to identify what might cause a fraud to occur, or detail the risk factor itself;
–determine the specific fraud risk;
–determine potential fraud schemes or scenarios associated with the risk;
–identify affected financial accounts;
–identify staff positions that could potentially be involved;
–try to assess the type, likelihood, significance and inherent risk(s) involved;
–formulate the controls or changes to controls that could mitigate the risk;
–classify the controls by type (i.e., preventative, detective, entity, and process level);
–identify and assess residual risk.

Certified fraud examiners (CFE’s) have an active role to play in tailoring the CSA format for use in risk identification and mitigation as well as in performing actual facilitation of the CSA sessions.   Specifically, CFE’s can help client staff develop a more detailed, in-depth understanding of complex fraud risks that management and operational staff sometimes only vaguely perceive.  Armed with the knowledge developed during the CSA session(s) and coupled with their risk assessment and group facilitation skills, CFE’s can assist management and the audit committee of the client identify, assess, and develop final fraud risk mitigation strategies to strengthen the fraud prevention program of the organization as a whole.  Following what are sometimes multiple CSA sessions, CFE’s can assist the team in detailing the menu of anti-fraud measures developed during the individual sessions in a report to client management embodying the anti-fraud recommendations of the CSA team members to the Executive Management Team and to the audit committee for their consideration.  It’s up to upper management to decide which of the CSA team’s anti-fraud recommendations to implement and which of the team’s identified risks to accept.

Just a few of the advantages of conducting fraud prevention related CSA’s for critical client business processes include:

–building fraud risk awareness among those middle level managers charged with day-to- day management of our client companies business processes;
–mapping organization wide fraud prevention efforts to specific business processes;
–establishing links between information technology (IT) systems development projects and the broader fraud prevention program;
–identifying, documenting and strengthening fraud prevention skill sets across all the business processes of the organization;
–support for the construction of a strong, management supported fraud prevention program that enjoys full management and board support organization wide.

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