Saturday, April 18, 2009

Clearly set out what your organisation defines fraud to mean

There are many definitions of fraud. However, to deter and detect fraud, an organisation needs to clearly define what fraud means to them and maintain a consistent definition across the Fraud Control Policy and any other policy or Code of Conduct where the definition may appear.

Examples of definitions of fraud are as follows.

Butterworths Concise Australian Legal Dictionary defines fraud as:

An intentional dishonest act or omission done with the purpose of deceiving.

Paragraph 9 of ASA 240, the Australian Auditing Standard on The Auditor’s Responsibility to Consider Fraud in an Audit of a Financial Report states:

The term “fraud” refers to an intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage. Although fraud is a broad legal concept, for the purposes of this Auditors Standard, the auditor is concerned with fraud that causes a material misstatement in the financial report. Auditors do not make legal determinations of whether fraud has actually occurred. Fraud involving one or more members of management or those charged with governance is referred to as “management fraud”; fraud involving only employees of the entity is referred to as “employee fraud”. In either case, there may be collusion within the entity or with third parties outside of the entity.

Australia Standard AS8001-2008, Fraud and Corruption Control, defines fraud as:

Dishonest activity causing actual or potential financial loss to any person or entity including theft of moneys or other property by employees or persons external to the entity and where deception is used at the time, immediately before or immediately following the activity. This also includes the deliberate falsification, concealment, destruction or use of falsified documentation used or intended for use for a normal business purpose or the improper use of information or position for personal financial benefit.

Section 408C of the Queensland Criminal Code (this is the definition I work with mostly as Queensland is my home state) defines the criminal offense of fraud as follows:

A person who dishonestly
applies to his or her own use or to the use of any person:

  • Property belonging to another; or
  • Property belonging to the person, or which is in the person’s possession, either solely or jointly with another person, subject to a trust, direction or condition or on account of any other person; or
  • Obtains property from any person; or
  • Induces any person to deliver property to any person; or
  • Gains a benefit or advantage, pecuniary or otherwise, for any person; or
  • Causes a detriment, pecuniary or otherwise, to any person; or
  • Induces any person to do any act with the person is lawfully entitled to abstain from doing; or
  • Induces any person to abstain from doing any act which that person is lawfully entitled to do; or
  • Makes off, knowing that payment on the spot is required or expected for any property lawfully supplied or returned or for any service lawfully provided, without having paid and with intent to avoid payment;

commits the crime or fraud.

When selecting a definition of fraud to use in your anti-fraud program, you need to select a definition that best suits the size and type of your organisation. Do not be afraid to use the definition of fraud as it appears in the criminal legislation in your country or state if a criminal charge of “fraud” is clearly defined.

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