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Internal Fraud: Develop Prevention and Detection Strategies to Reduce the Risks


Published in French on 03/18/2016 at 08:43 on by MNP.

According to the Association of Certified Fraud Examiners (ACFE), occupational fraud, also called economic crime, is defined as “the use of one’s employment for personal enrichment through the deliberate misuse or misapplication of the employer’s resources or assets”. The principle is always the same: a fraud is committed by a company employee, manager or owner, using one or more schemes, including cost over-runs, falsified invoices, misappropriation of funds, corruption, etc., and the victim is the company itself.

It Only Happens to Others

No company – small, medium or large – is safe from the exposure to economic crimes. Fraud offences are constantly on the rise, and, as a result, the probability of your company being affected is increasing. Just one incident can be very costly. In its “2014 Report to the Nations on Occupational Fraud and Abuse”, which is based on an analysis of 1,483 cases of fraud that occurred in 100 countries, the ACFE points out that nearly 22% of fraud cases result, on average, in losses of a million dollars. This is without taking into account the costs related to the negative impact that fraud has on employee morale and business relationships, the company’s reputation and value, or public and customer trust.

Something else to consider: according to the results of the Canadian portion of the 2014 “Global Economic Crime Survey” (GECS), 61% of perpetrators of economic offences came from within the company, and 39% from outside. Not to mention that internal and external fraudsters are increasingly better equipped and able to find companies’ security weaknesses.

Anticipate Rather Than Check

Fraud risk management is a relatively new practice for many companies. However, it is essential in order to promote a culture of prevention and detection within the company, based on ethics and sound governance. “While Company executives may be sensitized to the risk of fraud, they do not necessarily follow up by putting in place a plan to manage that risk,” notes Corey Anne Bloom, Partner, Investigative & Forensic Services and IT Consulting with MNP. “On the other hand, when a company’s management implements strict effective internal controls and imposes disciplinary action, it places the odds in its favor with regard to detecting fraud risks or deterring any potentially fraudulent scheme.”

Don’t Become Paranoid

The development of internal fraud detection procedures and tools must be strategic and properly communicated. It would be a shame if in trying to do the right thing, more harm were done… “The important thing is to introduce measures that suit the company’s structure, culture and activities, without necessarily resorting to the full array of surveillance tools available; and especially to inform, sensitize and empower all staff with regard to the fact that fraud prevention is everyone’s responsibility, in the interest of everyone and for everyone’s benefit”, notes Corey Anne Bloom.

Establish an Action Plan

Identifying the necessary resources and budgets to be allocated to internal fraud prevention is clearly no small task: How does one determine the areas at risk within the company? How does one choose the best means to protect oneself from fraud? What should the role of senior management be in establishing and promoting behaviors and guidelines to fight against fraud? How does one sensitize the employees to the importance of heightened vigilance? How does one determine the percentage of the annual budget to allocate to prevention?

Simple and Effective Tools

No need to know the entire glossary and range of anti-fraud measures, nor to dedicate huge sums of money to implementing detection measures. Simple and effective tools exist for sharpening internal reflexes in order to detect indicators of suspicious activity or the early signs of wrongdoing. Security clearance for employees, protection of assets, internal and external audits or even computerized control systems come to mind. A tip line is also a highly effective tool available to employees to encourage them to report any ethical problems confidentially and anonymously. Again, according to the ACFE’s “2014 Report to the Nations on Occupational Fraud and Abuse” organizations that have a tip line enjoy two main advantages: they detect fraud cases twice as fast, and they lose 41% less money. “Provision of a tip line is part of a transparent management system,” maintains Corey Anne Bloom. “Taking this step is a tangible demonstration of the company’s commitment to apply sound management practices and ethics, and to establish procedures to address possible signs of potential fraud or irregularities.”