How Anti-Fraud Controls are Evolving

By Lowers & Associates,

Occupational fraud awareness is the focus of Fraud Week but it’s also a rising concern of organizations year-round. At least that’s the message in the data from the Association of Certified Fraud Examiners: 2016 Report to the Nations on Occupational Fraud and Abuse.

The report compares the implementation of a wide range of anti-fraud controls across reported cases, and finds that every single type of control was more prevalent in 2016 than it was in 2010. This is true even for very widely used controls like more traditional types of financial audits and management review. An important example is the external review of financial statements, the single most common anti-fraud tool, whose implementation rate increased .08% to 81.7%.

Workforce Participation is Key

More interesting, is that the types of controls that have increased the most are those that leverage workforce participation and cultural restraints. The implementation rate for a hotline increased 8.9%, anti-fraud training for employees increased 7.6%, the establishment of an anti-fraud policy by 6.8%, and a code of ethics, already high, increased 6.3%.

It’s useful to think of the anti-fraud policy and code of ethics as part of the cultural framework, the stated intentions for acceptable behavior. These standards have to be demonstrated from the top down, and built into expectations for every employee. They have to be used when fraud is detected to devise an appropriate sanction in response, without equivocation.

Hotlines and Anti-Fraud Training are On the Rise

The largest rates of implementation increase for hotline and anti-fraud training for employees reflects actions taken to facilitate the cultural shift. Unlike the cultural standards that justify these tools, but which exist primarily in the beliefs of employees, hotline and training are concrete policies an organization can implement and measure. The connection between hotline and fraud detection is a fact: 39% of frauds detected come via a hotline. Training is less obvious, but it moves directly against the efforts of potential fraudsters to make up rationalizations for stealing. Training helps remove excuses, and clarifies the intentions of cultural policies.

Given the performance of hotlines, it is no wonder they are being adopted by many organizations. The key to this performance is availability, security, and privacy. The employee who reports suspicious behavior via a hotline has to feel secure, that it will be taken seriously and that it will not jeopardize his or her social standing in the enterprise.

Anti-fraud training helps employees interpret the code of ethics or anti-fraud policy in the context of their working lives. It may teach them how to recognize suspicious behavior or patterns of abuse, and how to report them. The ACFE report is full of “red-flag” behaviors that can indicate fraud or abuse, and employees who recognize these are better able to multiply the strength of the fraud prevention effort.

It is encouraging that so many organizations both recognize the threat of occupational fraud and take steps to prevent it., The fact is, that organizations of all types worldwide lose about 5% of topline revenue to fraud means the fight is far from over. In fact, given that fraud is an individualized crime, the effort to prevent it can never succeed completely. But it can win many battles, perhaps one that saves your organization.

5 Basic Fraud Steps Every Organization Should Take

By Lowers & Associates,

Almost every organization is vulnerable to occupational fraud and abuse, and the impact of fraud can be costly. The 2016 Report to the Nations by the Association of Certified Fraud Examiners (ACFE), indicates that the worldwide loss to fraud across all organizations is 5% of topline revenue. Based on reported cases of fraud, the median cost per case was $145,000, and some others were much more.

As part of the International Fraud Awareness Week for 2016, ACFE published 5 Fraud Tips, a one-page summary of steps an organization can take to reduce its vulnerability. Implementing these steps cannot guarantee your organization won’t suffer occupational fraud, but it will certainly improve the odds.

1. Be Proactive

Top management needs to put in place policies and procedures that set a tone from the top against fraud. This may include a code of ethics taught to every employee, with on-going follow up training that emphasizes the danger and unacceptability of fraud. Traditional financial controls should be in place and reviewed on a regular basis, possibly with an independent internal audit function. Fraud prevention will be enhanced through organizational structures like effective separation of duties.

2. Establish Hiring Procedures

The person you hire may be a future fraudster. The hiring process is an opportunity to look into the background of an applicant to look for factors that may indicate risk. Where it is legal, and following best practice guidelines strictly, employers can run a variety of background checks to get a fuller picture of an applicant’s character.

3. Train Employees in Fraud Prevention

Employee training can go beyond the code of ethics. Employees are on the frontline of fraud, working with others every day and working with the systems and controls that are potentially vulnerable to fraud. These employees need to be aware of the signs of fraud both in evidence (such as breeches of a control), and in the behavior of their colleagues. One of the most difficult factors of fraud to combat is the pressure employees may feel to look for ways to commit fraud.

4. Implement a Fraud Hotline

A straightforward way to improve fraud detection is a fair and anonymous hotline for reporting potential frauds. A tip has long been the most important source for fraud reporting, and the hotline can facilitate it.

5. Increase the Perception of Detection

Fraudsters’ number one concern is getting caught. An anti-fraud culture in which there is regular training, communication, and discussion about fraud makes it clear to the potential thief that he or she will be under surveillance. When fraud does occur, the organization has to act decisively to prosecute, sending the message that the crime will have consequences.

Taking these steps can reduce the risk of occupational fraud. In the long term, the improved channels of communication up and down the organization may also help establish a happier workplace, which is a further barrier to fraud.

 

  Category: Fraud Prevention
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[Slideshow] 18 Fraud Facts to Drive Your 2018 Fraud Prevention Plan

By Lowers & Associates,

Fraud Week comes at a perfect time each year, just before the start of a new year when many organizations take a structured look at their performance over the past months, and begin to prepare for the year ahead. When it comes time to review your fraud risk management and prevention plan, it pays to have some hard statistics in front of you.

Our latest slideshow features 18 facts straight from the ACFE’s bi-annual Report to the Nations on Occupational Fraud and Abuse. The report can help you understand and respond to the threat of organizational fraud in your company, and the facts presented can serve as benchmarks for your organization while helping to uncover areas you may have failed to address.

How will you use these facts to create a more effective fraud prevention plan for your company in 2018?

  Category: Fraud Awareness
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Collusion: Teamwork at its Worst

By Lowers & Associates,

Teamwork is usually a good thing. Many organizations work hard to increase its effectiveness because well-coordinated activity can boost productivity and improve outcomes. Unfortunately, the effect of multiple people colluding to commit occupational fraud and abuse has the same kind of effect as good teamwork by increasing the impact of the crime.

Greater Collusion = Greater Loss

The Association of Certified Fraud Examiners (ACFE) 2016 Report to the Nations on Occupational Fraud and Abuse shows that the greater the number of people colluding in a fraud, the greater the loss. The median loss for a lone fraudster was $85,000, while losses where 5 or more colluded was $833,000.

It’s important to note that about 48% of the cases covered by the 2016 report involve collusion between two or more people. However, fraud by collusion was detected in about 18 months as compared to 16 months for the lone fraudster, so the duration of the fraud was not the prime source of the higher cost of collusion. In any event, the frequency and higher cost of collusion means that this form of fraud is a serious threat.

Working Together to Defeat Controls

Collusion may enable fraudsters to defeat controls based on separation of duties, independent verification procedures, or other procedural methods intended to reduce fraud or failure. Certainly, employees are expert in the application of controls where they work every day. When two or more of them coordinate activity meant to defraud the organization, they can defeat the controls at least for a time.

How to Detect Collusion

Detection of clever collusion schemes may be improved by setting up automated tracking or standardized analytical systems that flag unusual behaviors. For example, numerous transactions on a dormant or very low volume account or transaction amounts outside normal limits may indicate fraud. The system might flag changes in employee behavior, such as failure to take a vacation for a lengthy period of time or a significant change in working hours. The system might be designed to create norms for behavior in a given type of job and compare each person in that role to the norm. Outliers’ of behaviors could be scrutinized more closely.

Prevention is the Best Medicine

Of course, prevention is better than detection because detection means that fraudulent losses have already occurred. Potential fraudsters may leave a trail based on internal searches, such as searches for accounts whose inactivity means that they would not be regularly monitored, helping them to escape detection.

More straightforward, a well-designed hiring process with effective background checks, plus regular training in fraud prevention can help to create a workplace culture where fraud is not tolerated. Multiplying the number of people who would report suspicious behavior is probably the most effective means of fraud prevention, including collusion to commit fraud.

Why Fraudsters Do What They Do

By Lowers & Associates,

Most managers and owners eventually discover a case of fraud and abuse in their organization. The fraudster is often a trusted, long-time employee or manager who had or created access to some of the organization’s assets, and helped him or herself to it.

Why does this happen?

The answer is not simply greed, but most, maybe even all, people want things and want more things. There are studies that show an amazingly high proportion of employees or managers have taken small things from their organization. However, there is a line between this petty theft and intentional fraud that a few people cross over.

The Fraud Triangle: A Model for Understanding Fraud

The fraud triangle, created by criminologist Donald Cressey, lays out the three factors that make up a true case of fraud. Like all crime, fraud requires both motive (called “pressure” in most discussions of the fraud triangle) and opportunity. Cressey named two of the legs of his triangle after these, but added a third element—rationalization—that is needed to account for the fact that occupational frauds can go on for a very long time before being discovered. The rationalization allows the fraudster to dull the pain of remorse and carry on as if nothing were wrong.

It’s difficult to explain the incidence of fraud by opportunity. Of course, the crime cannot occur without opportunity, but the same circumstances are available to other people in the organization who do not yield to the temptation. Even the fraudster may be exposed to the opportunity for many years before stepping across the line.

The key to the fraud is pressure. There are as many sources of pressure as there are fraudsters, but the most typical one is financial. Fraudsters may suddenly need money they cannot get quickly enough by saving, perhaps for a debt or loss, or to compensate for a bad investment. Of course, greed plays a role when a desirable lifestyle cannot be supported by income. Some fraudsters may simply feel entitled by a real or perceived slight, by being passed over for a promotion, or other personal affront.

If the pressure is the motivation, then rationalization allows the fraudster to continue to live as a thief. The purpose of rationalization is to justify bad behavior, so it will frame the behavior as a righteous act. For instance, the fraud may be seen as a response of a mistreated small person against a cold, uncaring corporation. Whatever the specifics, think of the fraudster as believing that their gains are just deserts.

Most financial and organizational controls like segregation of duties are aimed at known opportunities. These are generally well known, documented, and taught. However, occupational fraud is almost always done by an insider who knows the controls very well. So, the motivational component is key, and neither internal controls nor external audits are designed to assess motivation.

How well do you know your employees?