Businesses lose millions to fraud

The average company loses as much as five per cent of its revenue to fraud every year, according to a global study.

Organisations in the Caribbean and Latin America are disproportionately affected. In 2012 the median loss caused by reported occupational fraud in the region was $350,000 compared with $140,000 worldwide.

The statistics come from a 2012 study produced by the Association of Certified Fraud Examiners.

The organization says there are a series of behavioural ‘red flags’ that company bosses should look out for in order to prevent them from falling victim to this kind of in-house crime.

Most occupational fraudsters are first time offenders with clean employment histories but in almost every case, the records suggest, they have displayed one or more signs that could have tipped off their bosses that there was something to worry about.

Around a third were living beyond their means, a similar number were experiencing personal financial difficulties while one in five showed an unusually close association with vendors or customers, according to the Global Fraud Study.

The organization believes fraud can be explained by a triangle of factors coming together – opportunity, rationalization and motivations.

Opportunity arises when there is poor management oversight or weak internal controls and employees believe there crimes won’t be detected. Motivation can come from a number of factors including family situations, medical bills or addiction problems. Rationalisation, a crucial component in a lot of fraud cases, is a form of self justification, with fraudsters attempting to convince themselves that their behaviour is not so bad.

The Association of Fraud Examiners points out in its literature on the subject:“There are a number of warning signs that can indicate that there may be a problem within your organisation.

“These should not be taken alone as evidence that fraud is occurring within the organisation; there may be other legitimate explanations for the occurrence of these indicators. They should be used to assess and manage the risk of fraud within your organisation.”

The association points to a list of factors to look out for from potential fraudsters including:

Consistently working longer hours than colleagues for no apparent reason

Sudden changes in lifestyle and/or social circle e.g. expensive cars, jewellery, homes, clothes

Changes in personal behaviour: these may be an indication of drugs, alcohol, gambling

Providing unreasonable responses to questions or easily annoyed at reasonable questioning

Reluctance to provide information to auditors

Competing or undeclared external business interests

On the financial side, they highlight potential areas of weakness including:

Lack of segregation of duties

Weak internal control environment and consistent failures to 
address major weaknesses

Delaying audits and/or requesting significant detail about proposed audit scopes

Disorganized operations in areas such as accounting, payroll or purchasing

Excessive cash-only transactions

Large volume of refunds to customers.

Large payments to individuals

From a procedure perspective, they highlight:

Management frequently overriding controls and policies

Inadequate monitoring or supervision by senior managers

Employees making procedural or computer-system enquiries inconsistent or not related to their normal duties.

Deficient screening for new employees including temporary staff, contractors and consultants

Insufficient oversight/audit.

An unusual number of customer complaints.

Suppliers/contractors insisting on dealing with just one individual.

Organisations can take action manage the risk of fraud and minimize the opportunities for it occurring. Actions organisations can take include:

As part of the organisations risk management consider the red flags for fraud

Take account of changes in business activities and/or control procedures that may open up new potential fraud risks.

Involve staff in identifying and discussing fraud risks and how to prevent fraud from occurring within your organisation.

Educate all staff and raise awareness of fraud indicators.

Implement systems and processes to detect the early warning signs of fraud.

Establish a credible mechanism, including whistle blowing policies and procedures, for staff to report suspicions of fraud. Encourage an open culture where the reporting of genuine suspicions is acceptable.

Be alert to possible collusion between staff and third parties.

Ensure regular monitoring of compliance with fraud prevention and detection policies, processes and controls.

Have a fraud response plan which outlines the policies and procedures to follow in the event of a fraud being discovered or suspected.

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