26 September 2006

Fraud: In Developed Country Operations...

Ron Connaught's "Fraud: Where The Perps are" in Corporate Board Member hit a nerve this issue.

It is not surprising that 60% of multinational companies think fraud is more likely to occur in their operations in emerging markets than in developed ones, an opinion that surfaces in Ernst & Young'’s ninth global fraud survey. But here i’s more of an eyebrow-raiser: 75% of the known cases of fraud over the past two years actually took place in those companies’ developed-country operations, according to the same survey.

We have seen other surveys from other organizations that have raised the issue of outsourcing / offshoring to emerging markets such as India and why this is such a high risk compared to other places on the globe. The misperception here highlighted by E & Y is that maybe we have lost sight of keeping our house in order even in those operations we deem to be under control.

Multinational's know that when they set up operations outside the US that they are going to be subjected to hiring a majority of that host countries people to staff the plant, call center or software development operation. The privacy laws and other legal implications of doing background investigations and verification of previous employment is difficult at best in these foreign states. This puts a tremendous burden on management to make sure that internal controls are in place to detect fraudulent behavior long before an act occurs.

A quality assurance review (QAR) is an independent look at a companies internal audit programs. Organizations who have realized that having a periodic QAR can help reduce fraud, also understand that it's good corporate governance, beyond the compliance with SOX. Supported by a QAR, an organizations IA department has a foundation to identify improvement options and provide guidance that can reduce risk and enhance the bottom line.

A Quality Assurance Review provides the audit committee, CEO and CFO with the opportunity to discover where and how fraud has found it's way into the organization even in those locations you thought were safe and sound.

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