This week is International Fraud Awareness Week – A week dedicated to promoting anti-fraud awareness and educating businesses and consumers about fraud, why it is important to stop it, and how to identify fraud to minimize its impact.
Fraud is defined as any intentional or deliberate act to deceive for financial or personal gain. Each year fraud costs the government, companies, and individuals billions of dollars, with the victims of fraud often experiencing dramatic changes to their quality of life.
Organizational fraud, where companies are defrauded, can have serious implications that can prove catastrophic in the most serious cases, while fraud against public institutions can place a significant strain on resources and undermines trust.
The extent to which fraud affects organizations is significant. The Association of Certified Fraud Examiners (ACFE) estimates an average organization loses around 5% of its annual revenue to fraud. Those losses can prevent pay rises from being given to employees, can result in job losses, and employees often face greater work pressures to increase revenue to make up for the losses.
Organizational fraud, which comes under the banner of white-collar crime, is typically financial in nature and is usually driven by financial need. Individuals choose to defraud a company as they see it to be the only option to solve a financial problem. Individuals who engage in organizational fraud often justify their actions in several ways, such as maintaining they are only borrowing money and will pay it back or thinking they are underpaid and deserve extra compensation. In order for fraud to occur, there must be opportunity. An employee must be provided with an opportunity to defraud a company or must at least believe it is possible to defraud the company and get away with it.
Organizational fraud takes many forms. At the most basic level, it involves stealing cash through skimming – removal of money before it has entered the accounting system – or through reimbursement for fictional or inflated business expenses. Inventory fraud schemes are also common, where goods are stolen from an employer and sold on, or company assets are used for non-business purposes.
More complex schemes include payment tampering, where employees prepare fraudulent payments for their own benefit or intercept legitimate payments intended for third parties. These schemes may also be conducted by third parties, such as in business email compromise (BEC) attacks where phishing and social engineering is used to redirect vendor payments or to change payroll information. Billing schemes are also common, where a victim organization is tricked into buying goods or services that are nonexistent, overpriced, or unnecessary.
Fraud can be conducted by anyone so it is important to raise awareness of fraud in the workplace and teach all employees the red flags to look out for that could indicate fraud.
Red flags include individuals living beyond their means, workers known to be experiencing financial difficulties, individuals with very close relationships with vendors or customers, individuals with control issues who are unwilling to share duties, a wheeler-dealer attitude, and individuals who act unusually with colleagues and are suspicious and defensive.
The ACFE Report to the Nations suggests 6 anti-fraud controls that can be easily implemented by organizations that have been proven to reduce fraud-related losses, as detailed in the image below.
Fraud prevention measures for companies. Source: ACFE Report to the Nations
Businesses should also consider conducting fraud awareness training and should encourage employees to report any potential wrongdoing and to implement a system where they can do so anonymously.