Whether our professional guidance provides adequate guidance for effective fraud risk management

This will be the summer challenging our industry’s guidance on fraud risk assessments. As you know, last month we asked a question whether fraud risk assessment is just an academic process that meets the standards.
This month’s blog will challenge professional guides for risk assessment. Does our professional guidance provide adequate guidance for effective fraud risk management?

In particular, we are considering the Fraud Risk Management Guide, Second Edition and Global Guidance for IIA, in particular the “IIA’s Global Practice Guide” titled “Internal Audit and Fraud.”

It should be clear that this is not right or wrong, but challenges your thinking process.

To illustrate my concern, I chose two examples of real-life fraud. Trust me, you can choose any industry and find the same examples.

Real-life fraud risk
I think we all agree that the airline industry is a mature industry. I think we can further assume that all major airlines have fraud risk management processes. I will further assume that the procurement of airline parts will be rated as high risk and exposed.

Here is my question: Did the following two examples happen because the fraud risk assessment does not take the offender into consideration? Is prevention and control over excessive dependence? Or both? Now, I know we don't know the answer. Only airlines will know this. But I will ask you to think about my two questions.

Is fraud risk assessment just an academic process that meets the standards?
Does our professional guidance provide adequate guidance for effective fraud risk management?

First example

David Kaminski-Morrow reported on May 28, 20025 that the alleged fraud of parts by the Turbofan Engine, director of the UK-based AOG Technics.

The office claims that in 2019-23, AOG Technics deceived customers by forging documents related to the origin, status or condition of aircraft parts. It is important to note that the investigation began in 2023 because an airline discovered fraudulent documents used to replace parts.

According to Bloomberg, AOG Technics was found to have deceived multiple airlines by selling unapproved and fraudulently certified aircraft parts, including those used by American Airlines, Southwest Airlines and Manchester United. AOG Technics also provides parts to Ryanair and Delta.

The second example

On September 8, 1989, a highly-reported and highly anticipated accident involving fake parts occurred. When 55 people flew from Oslo to Hamburg, a partner who flew from Oslo to Hamburg, crashed into the sea and killed everyone on the ship. Investigators determined that the forged bolts and brackets tear the tail of the turboprop. This is reported by Connector vendors, the only publication that follows news, trends, personality and innovation that affects the interconnection industry.

Now, without access to fraud risk assessment documents from various airlines, we can only speculate on what they say. But these are the following questions, and I want to ask the main auditor based on two examples:

Leonard's Challenge to Professional Literature

1. Is our literature oversimplifying fraud risk identification?
2. Does guidance focus mainly on the risks of historical fraud?
3. Does the guidance distinguish between the statement of fraud risk (what) and the scenario of fraud (how)?
4. Is prevention and control over the key strategy overemphasized?
5. How much guidance does the literature provide for hidden complexity?
6. Did mitigation calibrate the complexity of the perpetrator?
7. Does the literature recommend including industry information in the fraud risk statement?
8. Do you think the focus of risk assessment is on the record of fraud risks and on understanding fraud risks?
9. Do you think the goal of low residual risk leads to failure in fraud risk management?
10. Is there a realistic way to quantify fraud risk exposure?
11. If you were to change your professional literature, what would you suggest?

Let's evaluate two realistic examples to consider, asking the following two questions:

• Should the fraud risk assessment process be expected to counterfeit manufacturers?
• Should fraudulent authentication be expected for prevention and control?

I hope my information is clear. I think the proper fraud risk identity is not an easy task, and fraud risk management is even more difficult. This is one of the reasons I suggest we need to do better to understand fraud risks, rather than simply documenting advanced fraud risks and getting a low residual risk rating.

Honestly, I'm afraid we will enter the public accounting industry. The public accounting industry denies responsibility for fraud in financial statements, even if the world believes that auditors do have their responsibility.

Yes, I know that auditors should evaluate management’s risk assessment process. But will the world expect more of us?

Fraudulent trivia

1. What is the name of the movie “Ferdinand Waldo Demara”? The great impostor
2. Who plays Ferdinand Waldo DeMara in the movie? Tony Curtis.
3. What is the name of the university he founded in Alfred, Maine? Originally known as Lamennais College, it is now known as Walsh College.
4. Demara has two beliefs. What are they? One is that in any organization there are always a lot of loose, unused powers that can be picked up without alienating anyone. The second rule is that if you want power and want to expand, never infringe on anyone else’s territory. Open a new one
5. Demara has two basic rules. What are they? The burden of proof is on the plaintiff, “attack in danger.”
6. In which town did he be born? Lawrence MA,
7. This town is famous for its “bread and roses.” What's this? Political slogans related to women’s suffrage and labor movements and related poems and songs. It originated from a speech delivered by Helen Todd, an American female electoral activist. The phrase is usually related to the textile strike in Lawrence, Massachusetts between January and March 1912, between January and March 1912

1. According to the Times of Israel, between 2017 and 2019, it was allegedly a $1 billion in the Ponzi scheme?
2. The film has become the most watched documentary ever on Netflix and has received five Emmy nominations after the release of the documentary based on the Washington Post. What is the name of the movie?
3. When did his legal trouble begin?
4. He was arrested for using a fake passport?
5. According to the Israeli era, in 2020, what treatment did he get when he pretended to be a medical worker?

I've heard auditors say a lot of times, you need to think like a thief. So, do you think you can think like this liar? Can you make these plans?