[Fraud Risk Management] Employees should be kept unaware that management is watching for lifestyle and behavior changes In staff members that might indicate fraud.

The statement is false. A fundamental principle of fraud deterrence is creating a strong "perception of detection." Organizations should make employees aware that anti-fraud controls are in place and that management is actively monitoring for potential red flags, including behavioral indicators. This awareness increases the perceived risk of being caught, which serves as a powerful deterrent against fraudulent activity. Keeping such monitoring activities secret would eliminate their deterrent effect, transforming the control from a preventive measure into a purely detective one. Proactive communication about the anti-fraud program is a key component of an effective fraud risk management strategy.

The statement suggests that monitoring for fraud indicators should be a covert activity. This approach is incorrect because it fails to leverage the deterrent power of the control. The primary goal of a fraud prevention program is to stop fraud before it occurs. By communicating the existence of monitoring activities, an organization makes the "opportunity" element of the Fraud Triangle (Opportunity, Pressure, Rationalization) appear smaller to potential perpetrators, thus reducing the likelihood of fraud.

1. Association of Certified Fraud Examiners. (2023). Fraud Examiners Manual

International Edition.

Section 4.305

"Creating a Perception of Detection": This section explicitly states

"The perception of detection is the most effective fraud-prevention method... If potential perpetrators believe their fraudulent schemes will be detected

they will be less likely to commit them." It further explains that this perception is created through measures like employee anti-fraud education

proactive fraud audits

and clear communication of the company's anti-fraud policies

which includes informing employees that they are subject to monitoring.

2. COSO. (2013). Internal Control—Integrated Framework: Executive Summary.

Principle 1: Demonstrates Commitment to Integrity and Ethical Values: The framework states that management's commitment is demonstrated through a "tone at the top" that is communicated throughout the organization. This includes communicating expectations regarding integrity and ethics

which involves being transparent about the policies and controls in place to enforce those expectations

such as monitoring for fraudulent behavior. Secrecy would undermine this transparency and commitment.

3. Golden

T. W.

Skalak

S. L.

& Clayton

M. M. (2006). A Guide to Forensic Accounting Investigation. John Wiley & Sons.

Chapter 3

"An Overview of Fraud and the Forensic Accounting Environment": The text discusses deterrence and the importance of internal controls. It emphasizes that "visible" controls and the communication of a zero-tolerance policy for fraud are critical deterrents. The authors note that employees who are aware of monitoring are less likely to attempt to circumvent controls.

4. Wells

J. T. (2011). Corporate Fraud Handbook: Prevention and Detection (3rd ed.). John Wiley & Sons.

Chapter 15

"Building a Fraud-Resistant Organization": Wells

the founder of the ACFE

argues for proactive fraud deterrence. He states

"Employees should be educated about fraud prevention... Let them know what is and is not acceptable behavior. Let them know that the company actively seeks to uncover misconduct." This directly contradicts the idea that monitoring should be kept secret from employees.