2019 Fraud Week Wrap-Up

By Lowers & Associates,

We were proud to join the Association of Certified Fraud Examiners’ (ACFE) 2019 Fraud Awareness Week as an official supporter. Saturday, November 23, 2019 will conclude a weeklong effort by the ACFE to minimize the impact of fraud by promoting anti-fraud awareness and education.

Companies lose an estimated 5% of their revenue annually as a result of occupational fraud, according to the 2018 ACFE Report to the Nations. It turns out, the risk of occupational fraud is much higher than many managers and leaders realize. Each case results in a median loss of $130,000 and with cases lasting a median of 16 months, fraud is something organizations of all sizes must take care to detect and deter.

In support of Fraud Week, we produced several informational articles, which are summarized here for easy reference:

2019 Fraud Week Series: How Technology is Helping in the Fight Against Fraud

How Technology is Helping in the Fight Against Fraud

The key to catching fraudulent actions before real damage is done is having systems in place to ferret out anomalies and report suspicious activities early. This means being equipped with tools like automatic monitoring, artificial intelligence, and anomaly detection protocols. For instance, surprise audits and data monitoring are a powerful combination in reducing fraud loss. Though only 37% of the companies examined in the ACFE  study used them, those that did got fraud cases under control in approximately half the time and reduced fraud losses by more than 50%.

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The ACFE’s 5 Big Fraud Tips You Should Act on Now

The ACFE’s 5 Big Fraud Tips You Should Act on Now

As part of the 2019 International Fraud Awareness Week, the Association of Certified Fraud Examiners (ACFE) distributes information and training to help anti-fraud professionals reduce the incidence of fraud and white-collar crime. A recent ACFE publication, 5 Fraud Tips Every Business Leader Should Act On, spells out five ways organizations can work to prevent and minimize fraud in the workplace. We’ve paired their recommendations with the research-based actions you can take to achieve these aims.

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Recovering Fraud Losses: What the Numbers Reveal

Recovering Fraud Losses: What the Numbers Reveal

Losses from occupational fraud topped $7 billion in 2017, according to the Association of Certified Fraud Examiners’ (ACFE) most recent global study on occupational fraud and abuse, 2018 Report to the Nations. The median loss for all cases in the study was $130,000 USD, yet a full 22 percent of companies lost $1 million or more. To add insult to injury, only 15 percent of businesses that experienced fraud were able to fully recover their losses.

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7 Must-Haves for Occupational Fraud Prevention

7 Must-Haves for Occupational Fraud Prevention

These seven fraud prevention strategies, drawn from the 2018 Report to the Nations by the Association of Certified Fraud Examiners (ACFE), will go a long way in fortifying your organization against the conditions that can facilitate occupational fraud at the workplace.

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We hope you have taken some time this week to think about your 2020 fraud prevention programs and strategies and how you’ll build early fraud detection and proactive prevention into your processes.

No company is immune to fraud.

Recovering Fraud Losses: What the Numbers Reveal

By Lowers & Associates,

Recovering Fraud Losses: What the Numbers Reveal

Losses from occupational fraud topped $7 billion in 2017, according to the Association of Certified Fraud Examiners’ (ACFE) most recent global study on occupational fraud and abuse, 2018 Report to the Nations. The median loss for all cases in the study was $130,000 USD, yet a full 22 percent of companies lost $1 million or more. To add insult to injury, only 15 percent of businesses that experienced fraud were able to fully recover their losses.

Recovering Fraud Losses: What the Numbers Reveal

The common theme in the report is that, while it’s often worthwhile to pursue remedial action against perpetrators, victims will usually not be made whole. Here are three factors negatively impacting these recuperation efforts.

1. Failure to Report

After a fraud has been discovered and investigated, a case might proceed to prosecution, civil litigation, both, or neither. In its annual study, ACFE researchers tracked the percent of cases that were referred to law enforcement or resulted in a civil suit being filed for each year dating back to 2008. They found that the rate of criminal referrals has been gradually decreasing over that time, from 69 percent in 2008 to 58 percent in 2018. In contrast, the rate at which civil suits are filed has stayed consistent, ranging from 22 percent to 24 percent within the same timeframe.

There are many reasons why victim organizations might decide not to refer cases to law enforcement and therefore forego any additional recuperation of the loss that may result. The top five cited reasons are:

  1. Fear of bad publicity: 38%
  2. Internal discipline sufficient: 33%
  3. Too costly: 24%
  4. Private settlement: 21%
  5. Lack of evidence: 12%

2. The Greater the Loss, the Less Likely the Recovery

There is an inverse relationship between the amount that victim organizations lose to fraud versus what they are able to recover. So, even if the organization decides to pursue legal action, they are not likely to achieve full recovery. Here’s how the numbers panned out:

  • Losses of $10,000 or less had a 30% chance of recovery
  • Losses of $10,000 to $100,000 had a 16% chance of recovery
  • Losses of $100,001 to $1,000,000 had a 14% chance of recovery
  • Losses of $1,000,000 or more had an 8% chance of recovery

3. Desire to Avoid Fines

A third reason recovery efforts can be hampered is the knowledge that organizations may receive monetary fines from authorities for having inadequate controls in place and thus enabling fraud to occur.

Of the three types of occupational fraud – asset misappropriation, corruption, and financial statement fraud – the latter had the greatest likelihood of fines, at 17 percent. And, fines were imposed regardless of the size of the loss. For example, organizations that lost $10,000 or less were fined 14 percent of the time while those that lost $1,000,000 or more were fined 20% of the time.

At a median of $100,000 per fine, these penalties were no small matter.

An Ounce of Prevention

Given that recovery is an uphill battle, the takeaway is this: organizations should do what they can to prevent fraud from happening in the first place. Internal controls, codes of ethics, recognizing red flag behaviors, and the availability of reporting mechanisms are all tried-and-true methods for realizing that goal.

The ACFE’s 5 Big Fraud Tips You Should Act on Now

By Lowers & Associates,

The ACFE’s 5 Big Fraud Tips You Should Act on Now

As part of the 2019 International Fraud Awareness Week, the Association of Certified Fraud Examiners (ACFE) distributes information and training to help anti-fraud professionals reduce the incidence of fraud and white-collar crime. A recent ACFE publication, 5 Fraud Tips Every Business Leader Should Act On, spells out five ways organizations can work to prevent and minimize fraud in the workplace. We’ve paired their recommendations with the research-based actions you can take to achieve these aims.

1. Be Proactive

A code of ethics for management and employees sets the tone that your organization is committed to conducting business honestly and fairly. Fortify your commitment with internal controls around areas of the business that are vulnerable to fraud.

In its 2018 Report to the Nations, the ACFE studied nearly 3,000 incidents of fraud across 125 nations. Here are the top 10 most common anti-fraud controls they found among the organizations in the study:

  1. Code of conduct: 80%
  2. External audit of financial statements: 80%
  3. Internal audit department: 73%
  4. Management certification of financial statements: 72%
  5. External audit of internal controls over financial reporting: 67%
  6. Management review: 66%
  7. Hotline: 63%
  8. Independent audit committee: 61%
  9. Employee support programs: 54%
  10. Anti-fraud policy: 54%

The study found that weaknesses in internal controls were responsible for nearly 50 percent of all fraud cases.

2. Establish Hiring Procedures

Background checks will continue to be one of the best practices any workplace can implement, yet surprisingly, a full 96 percent of fraud perpetrators had no prior fraud conviction, according to the AFCE’s 2018 report. Therefore, understanding the behavioral red flags displayed by fraud perpetrators can help organizations detect fraud and mitigate losses. The AFCE found that 85 percent of fraudsters displayed at least one of the six red flags listed below and 50 percent of them exhibited multiple red flags.

Six Red Flags of Fraud:

  1. Living beyond means
  2. Financial difficulties
  3. An unusually close relationship with vendor/customer
  4. Control issues, unwillingness to share duties
  5. Divorce/family problems
  6. “Wheeler-dealer” attitude

3. Train Employees in Fraud Prevention

Looking for signs of fraud isn’t top of mind for most employees, but having a code of ethics and internal controls create a strong workplace culture that’s attuned to the possibility of fraudulent activity. Employers can take this awareness a step further by educating employees on how to recognize fraud in their day-to-day lives.

Here are the top eight concealment strategies used by fraudsters:

  1. Created fraudulent documents: 55%
  2. Altered physical documents: 48%
  3. Created fraudulent transactions in the accounting system: 42%
  4. Altered transactions in the accounting system: 34%
  5. Altered electronic documents or files: 31%
  6. Destroyed physical documents: 30%
  7. Created fraudulent electronic documents or files: 29%
  8. Created fraudulent journal entries: 27%

4. Implement a Fraud Hotline

Now that employees know some of the signs to look for, employers should also provide a clear means for reporting suspected fraud. The top three ways that fraud is detected are through tips (40%), internal audits (15%), and management review (13%).

Employees are responsible for reporting 53 percent of occupational fraud cases with the remaining coming from outside parties, such as customers, vendors, or shareholders.

Having a fraud hotline has proved to be instrumental in detecting fraud. In fact, 46 percent of cases detected by tips in the AFCE’s study had hotlines versus 30 percent coming from tips where no hotline existed.

5. Increase the Perception of Detection

Keeping the risk of fraud both top of mind and at the forefront of your organizational policies and practices is key to preventing, recognizing, and mitigating its impacts. In addition to having employees sign a code of conduct, make sure you’re regularly communicating to staff about anti-fraud policies. Remind them of the methods available to report suspicions of misconduct and the potential consequences (including termination and prosecution) of fraudulent behavior.

Though 42 percent of the organizations in the 2018 Report to the Nation offered hotlines to report fraud tips, other mechanisms are also readily available. They include:

  • Email: 26%
  • Webform/online: 23%
  • Mailed letter: 16%
  • Other: 9%
  • Fax: 1%

To learn more about helping your organization combat fraud, stay tuned here for the rest of our our 2019 Fraud Week Series. If you need help formulating your fraud prevention program, request a meeting with a risk management expert at Lowers & Associates.

The College Admissions Fraud Triangle [Infographic]

By Lowers & Associates,

Can the Fraud Triangle Help Us Understand How the Higher Ed Admissions Bribery Scandal Happened?

 

High-profile stories of fraud in corporate America are commonplace, but the details surrounding Operation Varsity Blues – the biggest college admissions bribery scandal of its kind to be prosecuted by the US Justice Department – reveal how fraud is an equal opportunity threat.

Pressures, opportunities, and rationalizations of all sorts combined to create a situation for coaches, parents, admissions personnel, and test administrators to deceive the admissions system. In total, $25 million was reportedly paid in bribes and 50 defendants were named in the case.

Criminologist Donald Cressey’s Fraud Triangle offers a framework for understanding the factors that lead people to commit fraud. In the infographic below, we use the fraud triangle as a model for understanding how the college admissions scandal happened.

Colleges and universities are not immune to fraud, and it’s imperative that administrators have protections in place to safeguard their reputations and resources. The infographic outlines a few key prevention measures.

Check out the full infographic here:

college admissions bribery scandal fraud

  Category: Fraud Awareness
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College Admissions Scandal: Are We too Quick to Blame the Institutions?

By Lowers & Associates,

College Admissions Scandal

The college admissions scandal has caused quite a stir in the media over the last few weeks. The stories have varied, the fraudsters are unique to each situation, but in the end it’s the same old tale; the rich use money and power to influence the morally weak and advance those closest to them to undeserved positions of grandeur. The key in this case is that schools across the US are being brought down to the same level as the criminals and fraudsters that perpetrated the crime in the first place.

Yale University, founded in 1701, has graduated five U.S. Presidents, and prides itself on its motto, ‘Lux et veritas’ or in English “Light and Truth.” However, a Yale soccer coach was able to pull off a scholarship-based fraud in which a student was accepted without merit. Is this Yale’s fault? Perhaps in part, but I would like to blame it on a much larger, systematic fraud scheme that can easily be discovered and rectified with appropriate planning and execution.

Other schools were involved in Title IX fraud, SAT proctoring schemes, and direct fraud from payoffs or bribes. Each school left a back door open for a fraudster to come barging through and in the end, will be sued for millions of dollars. These lawsuits, some frivolous and others merited, will need to be tried and tested. What can your institution do to avoid situations such as this?

In our experience, fraud is perpetrated in larger educational institutions and corporations when the controls breakdown or are antiquated. There are simple ways to enhance controls and become a much more aware organization.

Some important tips that we feel will mature your organizational fraud prevention controls are below.

Enhance Internal Controls

When looking at sophisticated organizations such as a university, one might think that internal controls are deployed across the enterprise. However, this was not the case in athletics, where some of the fraud was perpetrated. Entities should implement enterprise wide systems of internal “dual control” whereby a minimum of two people are involved in the decision-making process/function. The purpose of dual control is to deter fraud, provide a properly documented audit trail, maintain quality assurance, and prevent extortion. This dual control process creates a system of “checks and balances” in which a single person (authorized person(s) within a department) does not have the sole authority to decide without the verification and approval conducted by a secondary and separate department (authorized person(s) within that department). This helps to mitigate the potential for collusion. These obvious changes can deter fraudulent actions and lead to much more effective fraud deterrence. Internal control is vital when trying to ensure that protocols and regulations are carried out according to policy.

Make your organizations aware, and force reporting

Create a fraud risk policy with demonstrative cases that establish consequences for perpetrators. It sounds simple, but this is a critical step in setting up the consequential deterrence that is sometimes needed to stop amateur fraudsters. If individuals in the organization are aware that management is looking for certain types of fraud, they might think twice before acting.

An additional aspect of organizational awareness is to implement reporting. In any instance where there is a violation of policies or an employee feels there is a violation by someone else, encourage reporting. Anonymous reporting/tip lines have historically been the number one means by which occupational fraud is discovered. These reports and tips need to be vetted and followed up to ensure there are consequences. As the fraud risk policy matures, there should be a noticeable difference that will help secure organizations from becoming victims of fraud.

Know Your People

Fraudsters tend to demonstrate behavioral traits that can indicate they have committed or are candidates to commit fraud. Comprehensive background screening can be the first step in ensuring that there are no concerns prior to offering employment. However, initial background checks are not enough.

Employers and leaders need to listen to what employees are saying. If there are divisional leaders, or in this case coaches and deans, that are deeply respected or far too entrenched in the internal control environment, they can create circumstances that could lead to fraud. For instance, USC, who saw their senior athletic director implicated, was victim to the college admissions scandal when the water polo coach recruited a student who didn’t even play water polo! Had USC screened each scholarship athlete and ensured there were controls and reporting in place, this could have been avoided. Now, USC is at the mercy of the judicial system.

In conclusion, it is amazing that these events transpired in today’s digital environment, but it clearly demonstrates a lack of understanding when it comes to the willingness of fraudsters to attain what they want. Legacies are now tarnished over the acts of bad actors and their accomplices.

Lowers Risk Group prides itself in delivering solutions to our clients that rectify these types of situations.

Contact us to learn more.

  Category: Risk Management
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