Fraud Risk: The Missing Link in Comprehensive Risk Assessments

Consideration of Fraud Risks

The requirement to evaluate and mitigate risks to information and systems, along with the need for a strong control environment, necessitates the consideration of fraud risks. Organizations undergoing SOC 2 audits should ensure that their risk assessments include a thorough evaluation of fraud risks and appropriate controls to address these risks.

Here’s how fraud risk evaluation fits into SOC 2:

SOC 2 and Fraud Risk Evaluation

1. Trust Services Criteria - Security:

The Security criterion, which is foundational for all SOC 2 reports, requires organizations to protect information and systems against unauthorized access. This implicitly includes evaluating the risk of fraudulent activities that could compromise security.

2. Control Environment and Risk Assessment:

The principles of SOC 2 include establishing a strong control environment and performing comprehensive risk assessments. As part of this, organizations must assess risks that could result in fraud, such as unauthorized access, data manipulation, or financial misstatements.

3. Systematic Approach to Risk:

SOC 2 emphasizes the importance of a systematic approach to identifying and managing risks, including those related to fraud. This involves identifying potential fraud scenarios, evaluating the likelihood and impact of fraud risks, and implementing controls to mitigate these risks.

Does ISO 27001 Require Fraud Risk Evaluation?

ISO 27001 does not explicitly require the evaluation of fraud risk as a standalone category. However, the standard does require a comprehensive risk assessment process that would encompass various types of risks, including those related to fraud.

Here's how fraud risk evaluation fits into ISO 27001:

ISO 27001 and Fraud Risk Evaluation

1. Risk Assessment Process:

Although fraud is not explicitly mentioned, the standard's broad approach to risk assessment means that any risk to the confidentiality, integrity and availability of information should be considered, which includes fraud risks.

2. Annex A Controls:

While fraud is not specifically mentioned in Annex A controls, many controls can indirectly address fraud risks:

• A.6.1.2: Segregation of duties, which helps prevent fraud by ensuring no single individual has control over all aspects of any critical function.

• A.9: Access control measures, which limit who can access sensitive information and perform critical functions, reducing the risk of fraud.

• A.16.1: Management of information security incidents, which includes procedures for detecting and responding to fraud.

3. Context of the Organization:

ISO 27001 requires an understanding of the internal and external context of the organization (clause 4.1). This context can include fraud risks relevant to the organization’s environment and operations.

4. Interested Parties:

Understanding the needs and expectations of interested parties (clause 4.2) can also involve considering fraud risks that might concern stakeholders such as customers, partners, regulators and employees.

5. Risk Treatment Plan:

The risk treatment plan developed as part of ISO 27001 should include controls to mitigate identified risks, which may involve implementing measures specifically designed to prevent and detect fraud.

Tips to Fend off Fraud

• Identify Fraud Risks:

Consider various types of fraud, including internal fraud (e.g., employee theft, manipulation of data) and external fraud (e.g., hacking, phishing attacks).

• Assess Likelihood and Impact:

Evaluate the likelihood of fraud occurring and the potential impact on the organization and its customers. This includes considering past incidents, industry trends and the specific context of the organization. Assess the likelihood of fraud occurring and its potential impact on the organization’s information security objectives.

• Implement Preventive Controls:

Develop and implement controls to prevent fraud, such as segregation of duties, access controls and monitoring mechanisms.

• Detective Controls:

Establish controls to detect fraud if it occurs. This could include regular audits, transaction monitoring and anomaly detection systems.

• Implement and Monitor Controls:

Put in place preventive and detective controls to mitigate fraud risks. Regularly monitor these controls to ensure their effectiveness.

• Integrate with Incident Management:

Ensure that the incident management process can handle fraud incidents effectively, with clear procedures for reporting, responding to and recovering from fraud-related incidents.

Have a robust incident response plan in place to quickly address and mitigate the impact of fraudulent activities.

Conclusion

Fraud risk is an essential component of comprehensive risk assessments for any organization, especially those seeking compliance with standards like SOC 2 and ISO 27001. By integrating fraud risk evaluation into their overall risk management strategy, organizations can better protect their information systems and maintain the trust of their stakeholders.

Ultimately, the goal is to create a resilient control environment where fraud risks are continuously evaluated and mitigated, safeguarding the organization’s assets, reputation, and the trust of its customers and stakeholders.