Organizations around the world fall victim to fraud when three elements come together: opportunity, motive, and rationalization. Significant and effective fraud has been estimated by the Association of Certified Fraud Examiners (ACFE) to cost organizations 5% of revenue every year.1
The term, “fraud,” is defined as wrongful or criminal deception intended to result in financial or personal gain. The fraud-risk landscape is changing and is influenced by numerous macroeconomic and microeconomic factors. Currently, lingering impacts from the COVID-19 pandemic, including a distributed workforce, high employment turnover, and supply chain issues, are greatly influencing the rate of opportunity to commit fraud. These factors impact people and businesses in new ways. As a result of this changing dynamic in the workplace, employees are challenged to adapt quickly, and negative pressure to perform can build. When the pressure becomes high, rationalization might become easier, and if an opportunity presents itself, they would meet the three factors to commit fraud.
More than $4.7 billion is lost to occupational fraud worldwide according to the ACFE. Organizations with the fewest employees had the highest median loss. The Top 5 median losses by industry include real estate, wholesale trade, transportation and warehousing, construction, and utilities. The No. 1 industry affected with the most fraud cases was banking and financial services, and government and manufacturing trailed in the number of cases.1
Businesses with certain characteristics are more vulnerable to fraud. The following traits of businesses create fraud breeding grounds. A company
- entrusts employees with access to or control over assets without a good set of controls
- is hesitant to be strict or hold individuals accountable
- has high digital transactions
- has heavy cashflow
- establishes a culture of entitlement
- sets a culture in which employees lack investment in the company’s success (employees see their work as only a job)
Similarly, employees with certain characteristics are more likely to perpetrate fraud. The following traits of employees are linked to fraud potential. An individual who is
- greedy or entitled
- a bully or intimidating
- living beyond means
- experiencing financial difficulties
The good news is that fraud is being caught faster in comparison to prior years. The ACFE’s 2022 study shows fraud is detected within an average of 12 months versus 18 months in the 2012 study. Median losses are down 16% over the last ten years.1 While the fraud risk can never be fully overcome, organizations can implement evidence-backed solutions to minimize the risk.
Strategies to Mitigate Fraud Risk
To effectively protect your business from the harms of fraud, consider the following strategies for your organization:
Knowledge The best way to understand how fraud might be perpetrated is by staying aware of fraud schemes. At their core, fraud schemes are the same, but they are adapted to keep up with technology or current economic conditions. Corruption, asset misappropriation, and financial statement fraud are the three most common schemes listed in the most recent study disclosed in Occupation Fraud 2022: A Report to the Nations.1 For instance, cryptocurrency assets can be manipulated on financial statements but are still classified into the category of financial statement fraud.
Culture An anti-fraud culture can be an amazing tool to prevent fraud. Create a culture with annual fraud awareness training, a strong code of conduct, and zero-tolerance policies. Stringent hiring practices like background checks and the use of hiring tools can help companies hire individuals who possess honesty and integrity. Company policies such as job rotation and mandatory vacation can aid in prevention as the change of pace interrupts the expected routine and can help neutralize opportunities to execute fraud. Lastly, the presence of an internal audit serves a two-fold purpose: An internal audit’s presence can deter fraudsters, and it can detect fraudulent activity.
Hotlines ACFE found that organizations with hotlines detect fraud more quickly and have lower losses than organizations without hotlines. In fact, tips are the No. 1 way organizations discover fraud.1 Communicate the hotline procedures to employees and personnel outside of the organization. Additionally, poll employees annually to determine if they understand the hotline is the best way to report fraud.
Internal Controls The recent ACFE fraud study that reviewed more than 2,000 fraud cases noted nearly half of those cases occurred due to a lack of internal controls or because of an override of the controls. Segregation of duties, review and approval procedures, and external and internal audits are among the most effective controls an organization can implement. Regularly take a deep look into the organization to understand how fraud could occur and revamp the controls in place to address the findings. Identify the schemes to which the organization could be susceptible and build an environment that encompasses preventive controls. Some companies have hired third-party consultants for formal fraud risk assessments. Consultants perform a walkthrough and address any gaps in controls.
As the world is changing so are fraudsters. The pandemic created an environment that gives employees new opportunities to commit fraud. Establishing a culture of strong controls can help steer your organization clear of fraudulent wrongdoing and stop its occurrence.
If you need help with conducting a fraud risk assessment, implementing a fraud-prevention program, or any other matter related to mitigating risk or establishing internal controls and strategies, our executives are happy to assist. You may contact them by email or by calling (800) 270-9629.
1 Association of Certified Fraud Examiners. Occupational Fraud 2022: A Report to the Nations. 2023. https://legacy.acfe.com/report-to-the-nations/2022/