Are You a Fraud Fighter?

Here is how to increase your self-awareness and empower your organization to effectively prevent and detect financial fraud.

Fraud can happen at any time and to any company. Do you know the ways to protect yourself and your business? Every couple of years, the Association of Certified Fraud Examiners (ACFE) publishes its Report to the Nations, the most recent in 2018, illustrating the key trends in fraud worldwide and providing lessons for us on the frontlines to help reduce the risk of fraud. This report builds awareness of how you can prevent and detect fraud. Here are some key takeaways.

WHAT DOES A FRAUDSTER LOOK LIKE?

Fraudsters are as unique as each of us; they do not all look the same or act the same. However, the ACFE has uncovered some recurring characteristics of fraudsters that should be considered in conjunction with suspicious behavior.

• More tenured employees are more likely to commit fraud. In fact, 91 percent of frauds studied included perpetrators that had been at the company longer than one year.

• Fraudsters are more likely to be men. Approximately 69 percent of frauds studied in the report related to men, who also perpetrated larger frauds than women (on average, $156,000 versus $89,000).

• More educated employees are more likely to commit fraud — and they steal more. Sixtyone percent of fraudsters studied held a university or postgraduate degree and the median loss ($160,000-$230,000) from them is about double the loss ($75,000-$130,000) from fraudsters without degrees.

• Fraudsters steal more as they reach higher levels in the organization: The median loss of a non-manager, manager, and owner/executive is, respectively, $50,000, $150,000, and $850,000. Fraudsters also tend to steal more money as their ages increase.

• Employees with clean records are more likely to commit fraud — 89 percent of fraudsters have never been charged or convicted of prior frauds, and 85 percent have never been punished or previously terminated for fraud.

HOW DO FRAUDS START?

John Warren, VP and general counsel at ACFE, has stated that people tend to consider fraud an accounting issue when it is mainly a behavior issue. We should focus on the behaviors that tend to arise before frauds happen that can lead to unethical behavior. The ACFE has identified six red flags that frequently show up in fraud cases: living beyond means (41 percent), financial difficulties (29 percent), unusually close association with a vendor/customer (20 percent), control issues/unwillingness to share duties (15 percent), divorce/family problems (14 percent), and “wheeler-dealer” attitude (13 percent).

All six red flags have shown up in every ACFE report since 2008, meaning they are consistent predictors of fraud. In fact, 85 percent of fraud cases studied in the report showed at least one of these flags, and 50 percent of cases demonstrated multiple red flags.

HOW CAN YOU BETTER PREVENT AND DETECT FRAUD?

Implementing anti-fraud controls can prevent some people from committing fraud, help to detect fraud quicker, and reduce financial losses. According to the ACFE, three anti-fraud controls lead to lower fraud losses:

1. Publish a code of conduct. The presence of this control correlated to a 56 percent reduction in losses for companies that experienced fraud.

2. Implement proactive data monitoring and analysis. The presence of this control accounted for a 52 percent reduction in losses.

3. Conduct surprise audits. The presence of this control resulted in a 51 percent reduction in losses.

On the detection side, three means of identifying fraud have been the most successful:

1. Provide an anonymous whistleblower/tip hotline. Approximately 40 percent of frauds were discovered and reported through tips, which is a higher percentage than any other fraud identification method. You will need to educate your employees on which matters are intended for the hotline and which ones are intended for other HR reporting. People like when their voices are heard, so even if the issues reported on the hotline are not fraudulent ones, you can still identify negative trends that need to be addressed. Your employees will trust you more if you address issues illuminated by feedback.

2. Perform internal audits of work. Approximately 15 percent of frauds were discovered and reported through internal audit.

3. Ensure management is reviewing work. Approximately 13 percent of frauds were discovered and reported through management oversight.

HOW CAN YOU FIGHT FRAUD?

At the very least, take proactive steps to set up effective controls around financial processes so people cannot easily override them. It is important to implement controls not because of a lack of trust but because they are prudent and effective for your processes. Also educate employees about the importance of integrity and anti-fraud controls and then continue to reinforce their importance.

Of course, listen to your employees. Employees who feel appreciated and understood are less likely to commit fraud as a way of getting back at a boss or company. Beyond trying to prevent fraud, caring about employees is simply the right thing to do and will build your integrity.

The risk of fraud affecting your business is real. Take advantage of the ACFE’s findings — the return on investment for implementing anti-fraud controls is high and is in the best interests of everyone.