As the Practical Guide emphasizes, “An organization should strive for a structured as opposed to a haphazard approach.” The Guide is a good place to start developing a fraud prevention and detection program as part of your overall risk management efforts (or structuring a review of an existing program). But as always, diving into the details of organizing and implementing a program like this requires significant effort. Skipping steps or making assumptions about risks and mitigation practices without systematic assessment will often lead to gaps or weaknesses in the plan. … Continue reading
We recently received a call from a small business owner who had just discovered that a long time employee had been stealing from his business. The crafty scheme involved fictitious vendors and false invoices that resulted in checks being written to accounts belonging to the employee and his girlfriend. The thief (or thieves, as it turned out) was a trusted employee, of course, but rationalized taking the money so he could “support his family.” That is, support the family with luxury items, vacations, gadgets, and goodies.
This kind of fraud is distressingly common, despite that it is so hard to understand in the context of mature, cooperative behavior. We are simply programmed to learn to trust people that we share experiences and challenges with over a long period of time. We form teams.
The Rationale Does Not Have to be Rational
Donald Cressey’s well-known “Fraud Triangle” identifies three elements needed to trigger a fraud: opportunity, motivation or pressure, or rationalization. It’s the rationalization that most often strikes us as removed from reality in some way, or transparently false. We feel a shock when someone trusted betrays us, and our first reaction is that they must feel the same way—how could they do this? … Continue reading
The evidence is that organizational fraud occurs at a startling rate and at great cost. Fraudsters can occupy positions at any level and in any kind of organization, finding creative ways to enrich themselves at the expense of the organization. Owners, managers, and employees who dismiss or minimize the chances of fraud occurring in their workplace do so at their financial peril.
The hard truth about organizational fraud is that new fraudsters emerge every minute. They are not born that way—need, self-serving justifications, and opportunity can turn a trustworthy employee into a thief without warning. Situations such as addictions, family troubles or financial pressures can help to create the circumstances that might trigger fraudulent behavior in someone who wouldn’t normally commit fraud.
In other words, the most salient fact about fraud is that it is a highly probable event given enough time for a would-be fraudster to find opportunities somewhere in the organizational environment. Fraud is as constant as human nature.
You Cannot Eliminate Fraud, But You Can Manage It
Given the continuous emergence of new fraudsters, it’s easy to understand when some organizational managers throw up their hands in defeat. But the risk of fraud can be managed just like any other risk. In a column on this topic, the Economist summed it up:
Fraud by wayward employees, be they high or low, can never be eliminated. Directors and executives can, however, treat it like any other unavoidable risk, and manage it professionally. … Continue reading
Saturday wrapped up Fraud Week, the Association of Certified Fraud Examiners’ (ACFE) international week of anti-fraud awareness. We are extremely proud to have joined hundreds of organizations around the world to support this effort.
The risk of organizational fraud is much higher than many managers and leaders realize, as shown in the Report to the Nations research series sponsored by the ACFE. With a median loss of $145,000 in cases reported in 2013, fraud presents a risk to all organizations comparable to any other human risk factor.
In support of Fraud Week we produced several informational pieces, which are summarized here for easy reference:
This visual guide summarizes 10 key findings from the ACFE 2014 Report to the Nations and offers some tips to develop an effective fraud prevention program. Highlighted is the amazingly high incidence of fraud and counter measures that work to reduce the probability and cost of fraud. Get your copy of the guide here.
The Risk Mitigator is our monthly e-newsletter for risk managers and others concerned about organizational risk of all kinds. To honor International Fraud Awareness Week, we distributed a special edition of the newsletter highlighting some of our top fraud-related articles from 2014. These articles link prevention to the basic causal factors of fraud, and offer specific strategies and tactics organizations can use in designing prevention programs. View the special edition here.
Published during Fraud Week, this blog post offers tips for connecting the findings in the ACFE research with fraud detection and prevention strategies. The characteristics of fraudsters show that they will blend into the background of most organizations—they can be people at any level, with long tenure, and access to financial resources. The best response to this threat is to identify where the opportunities for fraud exist, and create controls or structures that make it harder to commit fraud and/or easier to detect.
One of the most striking findings in the 2014 Report to the Nations is that fully 40% of frauds were detected by a tip, often from someone within the organization. This makes a whistle-blower program almost mandatory for organizations that are serious about fraud prevention. This blog post explores the issues in designing an effective program, including how to overcome the natural reluctance of one employee to report on someone who may be a friend as well as a co-worker.
Every organization is at risk of fraud. And every organization can lower that risk with a well-structured fraud prevention program. Request a meeting with Lowers Risk Group to find out more about how your organization can fight fraud.
Organizational fraud is a hidden crime. But when it is detected, it is often by a colleague or employee of the perpetrator who happens to discover the fraud – over 40% of the initial detection of a fraud is through a tip, most often from an employee. That’s why the ACFE Fraud Prevention Checkup highlights the necessity of a fraud reporting mechanism, in other words, a whistle-blower program.
An effective whistle-blower program has to both encourage the person who discovers the crime to report itand give him the means to do so. A potential whistle-blower may be someone who works closely with the perpetrator, with bonds of friendship or fears of retribution. The program needs to overcome these barriers to be effective.
In fact, research by the law firm Labaton Sucharow reported in Security Magazine in an article by Jim Ratley found that 34% of employees have learned about “workplace misconduct” and that most of them would report it if they could. The factors that could encourage them to report the issues included remaining anonymous, avoiding retaliation, and getting a reward. … Continue reading
