International Fraud Awareness Week, established by the Association of Certified Fraud Examiners (ACFE), aims to bring attention to impacts of white-collar crime and encourage companies to protect themselves against this global threat. In its 20th year, this event has brought together organisations across the world with the common goal of educating businesses on the risks of fraud and how to prevent it from happening to them.
Fraud Week is a time for reflection and education within your company – are you aware of the dangers of fraud? Does your business have an effective fraud prevention strategy? Are you aware of the fraud red flags and why people commit fraud? These resources will help you answer these questions and give you a comprehensive understanding of fraud.
Is Fraud A Big Deal?
Many companies, and especially small business, tend to ignore fraud altogether. Business owners believe fraud prevention is not a priority, or that fraud won’t happen to them. The facts say otherwise.
The ACFE 2020 Report to the Nations found that organisations lose 5% of their revenue to fraud each year. This is not an anomaly either – in South Africa almost 75% of businesses reported experiencing some kind of fraud in 2018. The typical fraud case cost companies around $8000 a month (R128 000) and lasted 14 months on average before the scheme was detected. That amounts to a staggering $112 000 (R1.8 million) before detection.
Although the use of anti-fraud controls has increased, it is clear from the statistics that not all companies are onboard. One third of fraud cases resulted from a lack of internal controls, even though these control measures are proven to lower losses and aid in quicker detection.
Fraud is clearly a big deal, and no organisation is immune. If your company is behind on fraud prevention and awareness, or possibly hasn’t considered it before, this #fraudweek is the perfect time to start.
Why Do People Commit Fraud?
What do typical fraudsters look like?
What Are The Warning Signs of Fraud?
Fraud can be difficult to detect. The average time from commencement of fraudulent activity to detection is 14 months and massive losses can occur over that time. An awareness of the warning signs of fraud, and what to do if they are present, is vital in preventing these problems from impacting your business.
- Lifestyle Changes: An employee living beyond their means is the most common warning sign of fraud. Unfortunately, it is also one of the most difficult to identify and it involves an employee’s personal life outside the office. Signs of an employee living outside their means include driving expensive cars, taking lavish vacations, living in extravagant homes, or generally spending above what their salary allows.
- Financial difficulties: Employees facing debt are more likely to search for opportunities to resolve their debt problems, even if that involves illegal activities. Employees, even with no history of suspicious behavior, may take an opportunity to resolve their debt if they believe they will not get caught.
- Close relationships with vendors: If a close relationship is established with a vendor, an employee and the vendor could potentially conspire to find ways to charge the company more than what would be normal in an arm’s length transaction. The vendor receives extra money, and the employee receives compensation for setting up the system, with the company none the wiser. The fraud is difficult to detect as it is processed as a regular charge, allowing the activity to continue without detection for significant periods of time.
- Resistance to controls: Lack of compliance with existing controls, or resistance to increased controls, can indicate that an employee is possibly committing fraud. Small businesses are especially vulnerable to this problem due to limited controls (such as a lack of segregation) and a lack of focus on fraud as a concern. Where there are limited controls, and the business grows too quickly to keep track of all the loopholes in the operation, employees could take advantage.
- Refusal to take vacations: Although it may sound like a positive attribute to an employer, an employee’s refusal to take vacations can be a sign that they are afraid their absence will lead to the detection of illicit conduct. This red flag usually occurs when the employee is the only person involved or is vital in the functioning of fraudulent activities. Vacations will be delayed, or not taken altogether, in an attempt to keep an eye on the scheme and ensure the process continues to run smoothly.
- Increased use of cash: Cash is a highly targeted asset in fraudulent activities. If an employee insists on paying vendors or other employees in cash, or if there is an unusual or unexplained increase in the use of cash, it may require a closer look. It could be an employee’s method of covering illegal activity without being discovered.
- Employees not using proper channels or lacking explanation for their choices: Following proper protocol is vital in business operations, and in fraud prevention. This applies to all areas of the business, but particularly areas where vendors are involved. Procurement fraud is one of the most common types of fraud and business deals with other service providers are especially vulnerable. Similarly, if an employee makes a deal or decision without a clear justification, it may be a sign of irregular activity.
- Increasing Company Purchases: Business inventory is vulnerable to opportunistic fraudsters as it can be easily concealed. It may begin small – with an employee taking something as simple as a ream of paper home – but undetected, the theft can get out of hand quickly, leading to massive company losses. The faud is often discovered when the employee attempts to cover up the theft by increasing company expenditures on inventory or requesting more purchases where no explanation is present.
A Comprehensive Fraud Prevention Plan
Along with an awareness of the fraud red flags, a comprehensive fraud prevention plan is vital in anti-fraud strategy. It is far better to prevent fraud from occurring at all than to wait for it to happen to you. Follow this FraudWeek.com checklist to build or test your organizations fraud prevention measures.
- Is ongoing anti-fraud training provided to all employees of your organization?
- Is an effective fraud reporting mechanism in place?
- Is possible fraudulent conduct aggressively sought out, rather than dealt with passively?
- Is the tone at the top one of honesty and integrity?
- Are fraud risk assessments performed to proactively identify the organization’s vulnerabilities to fraud?
- Are strong anti-fraud controls in place and operating effectively?
- Does the internal audit department, if present, have adequate resources and authority to operate effectively and without undue influence from management?
- Are employee support programs in place?
- Is an open-door policy in place that allows employees to speak freely about pressures?
- Are regular anonymous surveys conducted to assess employee morale?
This checklist is a guide, but not an exhaustive one, and measures may differ between organisations. The size of your business and the industry you are in may require more targeted measures. To develop a Fraud Prevention and Detection Plan unique to your business needs, speak to The Fraud Triangle Forensics.
Take Action Now
Fraud prevention is extensive, but it doesn’t have to be complicated. There are steps you can take immediately that will lessen your vulnerability to fraud, and protect your business.
- Be Proactive. Adopt a code of ethics for management and employees. Evaluate your internal controls for effectiveness and identify areas of the business that are vulnerable to fraud.
- Establish Hiring Procedures. When hiring staff, conduct thorough background investigations. Check educational, credit and employment history (as permitted by law), as well as references.
- Train Employees in Fraud Prevention. Do workers know the warning signs of fraud? Ensure that staff members know basic fraud prevention techniques.
- Implement a Fraud Hotline. Fraud is still most likely to be detected by a tip. Providing an anonymous reporting system for your employees, contractors and clients will help uncover more fraud.
- Increase the Perception of Detection. Communicate regularly to staff about anti-fraud policies, ways to report suspicions of misconduct, and the potential consequences (including termination and prosecution) of fraudulent behaviour.
Participate this #FraudWeek by educating yourself and your employees. Host anti-fraud seminars at your offices and brush up on your company anti-fraud training. Educating your employees on the risks and consequences of fraud is vital in fraud prevention and serves as a deterrent to potential fraudsters at the same time.
Fraud awareness should not stop with Fraud Week. Understand and implement these measures throughout the year to protect your organisation and stay ahead of opportunistic fraudsters. It can happen to anyone – it is far better to be prepared than to be a statistic.
Visit FraudWeek.com for more.