South Africa has maintained its reputation of high economic crimes, claiming the #1 spot globally in 2016 and 2018. A whopping three out of four companies claimed they had experienced some kind of fraud or economic crime in their organization, leaving only 23% of companies fraud-free. With a 75% chance your company will fall victim to fraud, it is vital to understand the most common kinds of fraud, how to detect them, and the processes you can implement to prevent them.
1. Asset Misappropriation
Asset misappropriation involves the theft or misuse of a company’s assets for personal gain and is by far the most common economic crime at almost 50% in SA and 68% worldwide. This category is not as simple as theft of cash or other assets – misappropriation of assets is a large umbrella of crimes.
Accessibility makes this one of the easiest types of fraud for employees to commit, but with the right checks in place, it can also be easy to detect. A 2014 study surveyed auditors who ranked the red flags of asset misappropriation by their importance, providing a good framework for things to look out for:
- Swapping cheques for cash.
- Journal entries in cash accounts that appear to be unique adjustments.
- A sudden increase in purchases from a certain vendor, or several purchases from the same one in the same month.
- Gaps in the cheques sequence.
- Documents prepared for management approval with a different typeface from those the system printed
- High usage of credit cards.
- Missing or forged void or refund documents.
While there is no fool-proof plan to avoid asset misappropriation, there are a few processes your business can implement to prevent these fraudulent activities:
- Ensure the duties of the check preparer and check signer are separated.
- Rotate duties of employees in accounts.
- Conduct random audits.
- Keep checks locked away.
- Checks and balances.
2. Fraud committed by the consumer
In second place at 42% is fraud committed by the consumer. This involves fraud committed by the end-user, including mortgage fraud, credit card fraud, claims fraud, cheque fraud, and ID fraud.
While these only affect certain categories of businesses, they were rated one of the most disruptive economic crimes and indicate all levels of the supply chain are susceptible to damaging fraud practices.
Although the red flags are different for each case, there are some common prevention methods that can protect business:
- Background checks.
- Cross-referencing consumer information.
- Double-checking signatures.
3. Procurement Fraud
Procurement fraud is a daily term for investigators. The rise in outsourcing of goods and services means companies are at a higher risk, accounting for the 39% prevalence of procurement fraud. It is also one of the most common types of fraud perpetrated by managers or senior staff, making it much more difficult to detect.
Procurement fraud often involves quid-pro-quo situations, where an employee of the company receives something in return for a contract. Like the other categories, there are a few types of fraud related to procurement:
- Kickbacks: payment or gifts received in exchange for ensuring a successful bid on a contract.
- Collusion: bids are manipulated to favor a certain outcome.
- Billing Fraud: submitting false invoices.
- Conflicts of interest: relationships between members of the procurement team and contractors or using company funds and contractors for private business.
- Delivery fraud: inflating prices after a successful bid, exploiting operating costs, or hiding unsatisfactory goods or services
The warning signs to be aware of when detecting procurement fraud are:
- Awarding contracts without proper procedure or justification.
- Continued use of a contractor with a high price and low-quality services.
- Extending the bidding period unnecessarily.
- Qualified contractors are disqualified from bids for unclear or suspicious reasons.
- Invoices share purchase order numbers.
- Close relationships or the giving of gifts to an employee by a contractor.
Rather than waiting to discover it, lower your risk of procurement fraud with these processes:
- Have an approved vendor list and checks in place when vetting new vendors.
- Implement a variation limit with vendors to prevent unexpected or unsubstantiated costs.
- Have a system to match the requisition, purchase order, and final invoices costs.
- Perform regular quality checks on all vendors.
No organisation can be immune to fraud but an awareness of the main risks, particularly in the South African context, can be vital in fraud prevention. Preventative measures may be extensive, but the effort put into these mitigates the costs later on – both financially and in company morale.
If you suspect or discover any fraud within your organisation, speak to The Fraud Triangle Forensics to discuss your options.