Even though companies understand the fraud risk factor – nearly 77 per cent of HR professionals accept that there is a risk that employees can initiate fraudulent activity because of the work-from-home arrangement during the pandemic – more often than not, companies do not take action to implement robust fraud prevention processes in place until the organisation is exposed to fraud or appear in the news due to an investigation, incident, or external and (or) internal violation. Based on the article by ACFE, we aim to answer the question of why companies wouldn’t adopt fraud prevention and detection measures proactively.
The answer is fear. It prevents business leaders from being proactive about fighting fraud. Business analytical tools and systems enable companies to quickly identify red flags, but they do not work as the fraud prevention tool. 67 per cent of CRI Group’s background screening survey respondents said that they encountered one type of fraud – employee fraud – in their career. It’s alarming to imagine how many other types of fraud have been encountered by others. And still, companies pay lip service to efforts to fight fraud. So how the fear factor plays into the decision to fight fraud?
Fear of associated expenses
Fraud prevention tool is a cost for which you don’t always recognise an immediate return. Consider it like a health or car insurance – when it comes to identifying and preventing risk and potential fraud, returns can be harder to quantify.
There are some concerns about spending money on a system that might or might not identify fraud. And if the system does identify fraudulent activity, companies are now obligated to spend more for the additional investigation and possible litigation. For some large organisations, it might not be a significant expense, but that’s money that could have been reinvested toward a company’s bottom line.
When trying to save their expenses, organisations forget that the expense fraud is one of the most common forms of occupational fraud: employees fudging on their expense accounts. Earlier this year, Lookers (London-listed company) warned investors they might be unable to buy and sell its shares from the beginning of July because of potential fraud on its books – confirming £19m charge to correct books after fraud inquiry. Whether through fictitious charges, fake receipts or invoices, or other improper use of expense funds, an expense account is sometimes seen as a low-risk, high-reward area for committing fraud. It shouldn’t be. Follow these 5 tips for preventing and detecting expensive fraud.
Fear of Technology
Based on ACFE, “companies are concerned that implementing new software technology might increase their exposure to fraud via data breaches. They’re also concerned that technology will replace internal auditors. While data encryption and similar tools can combat the risk of data breaches, addressing personnel concerns are trickier.” Technology is meant to assist, but not to replace people. It helps with identifying the red flags, but human input and investigation are required to determine if fraud is indeed occurring and check the facts.
Appointing a fraud investigator is a good idea in this case. Fraud investigators are the front line of establishing the facts of suspected fraud or other unethical business behaviour. A fraud investigator’s skillset and wide knowledge of fraud laws, evidence gathering and interviewing make them the go-to expert for investigating insurance fraud, financial fraud, procurement fraud, asset recovery, cyber fraud, healthcare fraud, retail fraud and other areas. In this article about fraud investigators’ role, we explore their key functions, responsibilities and knowledge, and how their skillset helps organisations.
Fear of reputation loss
“Companies might fear their reputations will take a hit if they uncover ongoing fraud schemes. Social media has evolved to become an incredibly popular form of information sharing, so all it takes is the hint of a rumour, and the damage is done. Employees might post the information — or alleged information — that makes it appear as though a company is attempting to hide something”, based on ACFE. This comes as the company’s advantage to be open with employees in their effort to fight fraud. Employees are less likely to whistleblow in public when they are safe and have internal options to report fraud and discrepancies. The key ways of managing the company’s reputation is being transparent, protect data and conduct due diligence. It may feel sometimes like your company’s reputation is out of your control. However, there are steps you can take to help manage your reputation and help steer the conversation. It becomes more difficult when you wait, and try to undo later the damage that has already been done. That’s why being proactive in maintaining a positive reputation is the best strategy.
Fighting fraud on the front line is key
Companies must realise that the benefits of fighting fraud far outweigh the fears. Engagement in an early fraud education process acts as a buffer, which could lead to fewer fraudulent losses. Procurement and payables professionals must implement efficient processes that address red flags and track — early and upfront — non-adherence to mandates. Below is a quick overview of best practices for engaging analytic tools and front-line staff to identify and prevent fraud.
- Tone at the Top. Of course, top-level management must be committed to addressing fraud prevention. However, it’s just as important for middle managers to adopt a zero-tolerance policy toward fraud. A lack of integrity can be contagious. If workers see their supervisors’ rubberstamping processes, it gives them little incentive to raise concerns when they find inconsistencies.
- Segregation of duties. No one should be responsible for an entire accounting function. The individual who sets up a vendor or client shouldn’t be the same person who approves invoice payments. It’s vital to have multiple eyes on the process, especially in smaller organisations where segregation of accounting duties might be limited or non-existent.
- Create a fraud-fighting culture. The very perception of detection helps prevent fraud. A fraud-prevention overview should be part of new employee orientation. Companies also should sign off on internal codes of ethics that outline the steps and procedures employees can take if they suspect fraud. Tips are consistently, and by far, the most common detection method. According to the Report to the Nations, tips detected more than 40 per cent of all cases. Publicise a hotline number both internally and externally for your vendors — one of your employees might even be seeking to collude with a client!
- Training and process audits. Perform anti-fraud training for employees annually, at a minimum. Increase your anti-fraud training if you have a substantial number of new employees coming on board. Annual fraud awareness and detection training sends a clear message to employees about your organisation’s high standards and could deter fraudulent activity.
- Vet suppliers and clients. If you want to avert various types of fraudulent schemes, it’s crucial that you understand the red flags to look for when onboarding a supplier or client. Vendor vetting in real-time can mitigate upfront risks and dictate those actions required to prevent fraud from slipping undetected through the system. Vendor portals prove invaluable for vetting suppliers using automated data validation.
- Take action: There’s no reason for you to identify or perform analysis if you’re unwilling to take action. Fraud prevention software can help you do more than detect fraud — it can highlight poor processes that might expose you to fraud. For example, you might have a legitimate vendor or client, but software can raise a red flag because of gaps in your set-up process. Analyse results, make changes, monitor and constantly learn from your processes.
Don’t let fear take control
It’s our duty to help diminish the fears that impede the fight against fraud. At CRI Group, we know that when you acknowledge those fears, we can effectively and together use the needed resources to combat them. We believe that analytics tools and proactive monitoring can turn idle threats into reality.
Our fraud examiners can assist you, don’t allow fear to paralyse you into inaction. Your business is at far greater risk for losses due to fraud than organisations who take advantage of fraud prevention tools to leverage their resources. The larger the organisation, the more complex and multi-faceted the governance and responsibility matrix for fraud detection should be. Passive detection methods aren’t enough anymore. It’s been proven time and again that instilling proactive efforts to discover or reduce fraud will increase the bottom line and enhance a company’s reputation.[/vc_column_text]
Risk Management and ABMS Playbook
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The “Risk Management & ABMS Playbook” provides tools, checklists, case studies, FAQs and other resources to help you lead your organisation into better preparedness and compliance. Our experts share their own plays to help you reduce risk, thereby preventing and detecting more fraud. The first section address risk management directly: proper third-party due diligence and critical background screening take center stage for this game plan. Section two tackles bribery and corruption, with tried-and-true measures you can implement to stay better protected and in compliance with strict laws and regulations.