Fraud Prevention Through Risk Assessment

Annie Yoder | July 5th, 2012

All too often, school clients come to us asking about fraud detection. But, needing fraud detection implies that there’s fraud to detect. Clients should really be asking us about fraud prevention. A proactive approach to fraud prevention, rather than a reactive approach to fraud, helps schools to stop fraud in its tracks.

One of the most important parts of fraud prevention is risk assessment. Determining your organization’s high risk areas will allow you to focus your efforts on the areas where they’ll be most effective – giving you the best bang for your buck.

Schools can put proactive fraud prevention systems in place in their districts, preventing fraud (and its harmful consequences) before it starts. Putting a risk assessment system in place starts with determining who’s responsible for it. The answer: everyone. From the high level officials like the Board of Education (and its Audit and Finance Committees), the Superintendent, Treasurer and executive staff members (like the Curriculum Director and principals), to all the schools stakeholders and community members – open and informal lines of communication will allow risk assessment to be a painless and ongoing process.

The risk assessment process, developed by The Institute of Internal Auditors includes four steps:

  • Risk Identification
  • Rick Likelihood
  • Significance Assessment
  • Risk Response

Risk Identification involves gathering information on potential risks from both internal and external sources. Through brainstorming, interviews and analytical procedures (for example, trend analysis), school officials can discover their risk points. Areas to consider for identification include cash collection points and departments with a lack of oversight. Areas with incentives or pressures (such as budget constraints or performance bonuses) are also ripe for risk; as are segregated accounts, such as athletic departments.

Risk Likelihood is the process by which officials determine the probability that fraud will take place in any of the areas identified during the risk identification phase. Officials conduct more interviews and review historical information to provide additional materials to supplement those gathered during risk identification.

Significance Assessment involves ranking the likelihood that fraud will occur in the identified risk areas in a specified time frame (for example, in one year).

Risk Response considers the cost/benefit analysis of taking proactive steps to prevent fraud in those most significant areas. Potential risk responses could include: increased training (including cross-training), surprise audits and updated policies.  Perhaps the most effective risk response is employee training; teaching employees how to spot fraud means more watchful eyes – and lower chances that a fraudster will get away with his scheme.

Although the high risk areas determined in the risk assessment process will be unique to every school, some areas of schools functions are inherently at high-risk for fraud. They include:

  • Fees receipts
  • Outside cash collections or related organization
  • Credit/purchase card expenses
  • Central garage or other storage locations
  • Fake vendors
  • Payroll with-holdings

The risk assessment process is not a one-off tool, but should be used on an ongoing basis, at a minimum of once per year. Accompanied by training on how to identify and report fraud, a risk assessment process can help schools to lower their fraud risk.

Contact our Ohio Government Auditors

Worried that your school is at risk for fraud? Want to institute a risk assessment process, but don’t know where to start? Contact Rea & Associates. Our Government accounting team will help you to put the processes that you need in place. Our certified fraud examiners will identify areas of your operation that are ripe for fraud and will help you put controls in place to prevent fraud before it starts.

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