On the Frontlines: Staying Ahead of Fraudsters
Blogs Ahmed Alkhmees, CIA, CFE, CRMA, CCSA Oct 18, 2023
Who among us doesn’t read the local and international news without occasionally being surprised by news of fraud committed by employees or leaders within the organization? It happens in both the public and private sector and at the local and international level.
Consequently, fraud has emerged as a rapidly spreading disease, posing a significant threat to organizations across various sectors. It leads to substantial financial losses and can severely impact an organization’s reputation, particularly in the age of social media.
Fraudulent activities encompass a range of complex and deceptive practices that can hinder an organization’s ability to detect them promptly. Accordingly, a slow response diminishes the organization’s ability to hold individuals accountable for the fraud and mitigate the resulting damages and financial losses.
Types of Fraud
Occupational fraud refers to fraudulent activities committed by employees within an organization with the intention to gain personal or financial benefits. Understanding the various types of occupational fraud and their impacts can help internal audit practitioners develop strategies to address fraud. There are three main types of occupational fraud as categorized by the Association of Certified Fraud Examiners (ACFE):
- Corruption: This type of fraud involves acts such as conflict of interest, bribery, illegal gratuity, and economic extortion. Employees may exploit their positions for personal gain or engage in unethical practices.
- Asset misappropriation: This type of fraud involves the theft or misuse of an organization’s asset. It can include cash embezzlement, theft of inventory, or misappropriation of a valuable asset.
- Financial statement fraud: This type of fraud involves manipulating financial statements to deceive stakeholders. Examples include fictitious revenue, overstating or understating financial figures, or fraudulent accounting practices.
Occupational fraud can have a serious impact on organizations. The ACFE’s Occupational Fraud 2022 report revealed some alarming findings. Here are some key highlights from the report:
- Financial losses: The report indicates that between January 2020 and September 2021, total financial losses from occupational fraud were $3.6 billion (based on 2,110 cases in 133 countries). This demonstrates the significant monetary impact that fraud can have on organizations.
- Categories of fraud: The main categories driving financial loses are asset misappropriation and corruption. However, while financial statement fraud is less common, it tends to be the costliest type of fraud.
- Detection method: About 42% of fraud cases are detected through tips, which come from sources such as telephone hotlines, online forms, or email. This highlights the importance of having a robust reporting mechanism in place for employees to report suspicious activities.
- Revenue loss: the ACFE estimates that organizations lose 5% of their revenue to fraud each year. This can have a significant impact on profitability and financial health.
- Duration of fraud: Typically, fraud schemes last around 12 months before being detected. This emphasizes the need for proactive measures to prevent and detect fraud.
- Collusion: Fraudsters are increasingly engaging in collusion, with 58% of cases involving two or more perpetrators.
- Recovery of losses: Unfortunately, 52% of organizations in the study did not recover any of the fraud losses they incurred.
How to Respond to Prevent and Detect Fraud
To better respond to fraud, internal auditors need to think like fraudsters and stay ahead of them. Also, what worked in the past might not be suitable today to prevent and detect fraud, especially with the advancement of technology. Here are some effective ways to enhance the prevention and early detection of fraud:
- Develop a strong whistleblower program. This includes developing effective policies for the program, continually building awareness of the program (especially for new employees), and providing protection for whistleblowers.
- Develop a fraud risk management program. This can include establishing a fraud risk management policy, forming a dedicated team, conducting a fraud risk assessment, selecting and deploying appropriate fraud controls, establishing a structured fraud reporting process, and maintaining a coordinated approach to managing and monitoring fraud risks.
- Explore technology. Use technology (e.g., artificial intelligence, data analytics tools, etc.) to support early detection of unusual patterns and red flags.
Addressing fraud risk is crucial for the organization to avoid devastating financial and reputational consequences. By implementing effective prevention and detection measures and holding perpetrators accountable, organizations can recover financial losses and protect their interests. Therefore, it is essential for the organization to stay ahead of organizational fraudsters and implement a robust strategy to mitigate fraud risks. It is not an easy task, but it is a necessary one to ensure the protection of the organization’s interest.