Amid “perfect conditions” for fraud to flourish, boards must improve controls and better harness the skills of internal auditors

With inflation in the UK now over 9%, soaring energy and food prices, and the cost-of-living crisis deepening by the day, business leaders are being urged to prioritise action to strengthen their defences against a rising tide of fraud cases.

A report from the Chartered Institute of Internal Auditors highlights how fraud risk was first exacerbated by the Covid-19 pandemic but is now being further heightened by the war in Ukraine and the cost-of-living crisis.

Meaning the temptation, motivation and opportunity for fraud has never been greater. All of which has created the perfect conditions for fraud to flourish, with fraudsters taking advantage of the situation using ever more sophisticated tools to commit their crimes.

John Wood, Chief Executive of the Chartered Institute of Internal Auditors said: “The Covid-19 pandemic, War in Ukraine and now the cost-of-living crisis have all exacerbated the risk of fraud and fraudulent behaviour. That is why we are urging boards and their internal audit functions to act now to strengthen their fraud defences.

“As we’ve seen from a series of company failures linked to fraud in recent years, prevention is always better than cure. Internal audit has a vital role to play in providing independent assurance that the organisation is effectively identifying, managing, and mitigating the risk of fraud, including advising whether the measures to prevent and detect fraud are robust.”

Opportunity for internal audit

Boards can better harness the skills of their internal audit functions to combat fraud by seeking independent assurance the organisation has a robust fraud prevention framework and effective controls in place to prevent and detect fraud.

Where fraud control weaknesses are found they can also recommend corrective action by senior management.

The launch of the report is set against the backdrop of a series of high-profile corporate collapses in recent years linked to fraud: including Carillion in 2018, Patisserie Valerie in 2019 and Wirecard in 2020.

In response, the UK government has recently announced it will publish a draft Audit Reform Bill, that will include measures to strengthen the responsibilities of company directors regarding the steps they have taken to prevent and detect fraud.

Richard Chambers, senior Internal Audit Advisor of AuditBoard (and former president and CEO of the Global IIA) said: “It is clear from this report that internal audit must be far more proactive in its approach to fraud and now is the time to step up. This must include ensuring the organisation is undertaking regular fraud risk assessments and that there is a strong fraud prevention culture in place underpinned by the right tone from the top.

”Fraud is a risk area where internal audit can demonstrate the value of the independent assurance and insights it can provide, so I urge internal auditors to get on the front foot in tackling fraud risk.”

The report makes several recommendations for boards and internal audit, including:

  • Both boards and internal audit functions must take a more proactive role in the fight against fraud, particularly during the current period of heightened volatility and uncertainty which is increasing the motivation, opportunity, and rationalisation to commit fraud (also known as the ‘fraud triangle’). 
  • Organisations must conduct regular and thorough fraud risk assessments that take account of the internal and external factors impacting the business.
  • Boards and senior management have a vital role in developing a strong fraud prevention culture within organisations, underpinned by the right tone from the top. internal audit can support this by helping to raise awareness around fraud and acting as a trusted advisor on areas that need improvement.
  • Organisations and internal audit functions must act now to prepare for the increased scrutiny and accountability on fraud from the government, regulators, and the public. Given the forthcoming draft Audit Reform Bill, they should proactively look out for and prepare for new rules and regulations on fraud that are coming down the track.

Step up internal controls

Sir Jon Thompson, chief executive, Financial Reporting Council said: “Whether it was Carillion, Patisserie Valerie or Wirecard, we’ve seen the devasting impact fraud can have, including bringing entire companies to their knees – damaging people’s jobs and pensions in the process.

”In line with the government’s clear intent to strengthen company directors’ responsibilities regarding fraud in the forthcoming Audit Reform Bill, it is imperative that boards and senior management act now to review and then strengthen their internal control framework.

”This must include ensuring the measures they have in place to detect and prevent fraud are robust. Internal audit has a vital role to play in providing independent assurance on fraud risk.

”With heightened levels of economic turbulence, I urge businesses to act on fraud now to help prevent major financial loss of the kind we’ve seen in recent years.”