The results of the ACFE’s recently published 2008 – Report to the Nation on Occupational Fraud and Abuse – “the Report” show that anti-fraud controls are not only an effective means of decreasing the likelihood of a fraud occurring, they also lessen the financial impact in the event that one occurs. This article explores some effective strategies for combating occupational fraud.
* Knowing the risk – Privately owned companies employing less than 100 personnel are the most commonly defrauded organizations. They accounted for over 39% of frauds and were also found to suffer the greatest financial loss, averaging $278,000*. Public companies are the next most frequent victims (28%), followed by government organizations (18%). Not-for-profit organizations experience the lowest incidence of fraudulent activity; however, they still account for 14% of all cases losing an average of $100,000 per fraud.
* Understanding why frauds occur – Many occupational frauds occur simply because they are allowed to happen. Lack of adequate controls was identified as the most common reason for fraud. Businesses which do not implement checks and balances or which give too much autonomy to employees often facilitate fraud, as individuals learn there is little chance their actions will be noticed, checked or questioned. Given that the average life span of an occupational fraud is two (2) years, and many perpetrators are first time offenders, it appears that many frauds occur simply because of opportunity.
* Creating an anti-fraud environment – The Report found that organisations which have implemented anti-fraud controls experienced significantly lower losses than those which have none or only poor controls in place.
* Snap audits – Surprise audits have been found to be particularly effective with the average financial loss experienced detected being $70,000. This was nearly one third of the average loss suffered by organizations which did not utilize them ($207,000). Put another way, businesses using this control tool lost 66.2% less funds per detected fraud than their counterparts who did not.
* Whistleblower hotlines – The Report identified that anonymous fraud hotlines are also an effective tool for combating frauds perpetrated by senior management. Sixty three (63%) percent of reports made to tip or whistleblower hotlines involved allegations Crimes against Humanity of fraud against managers or executives. Given that the more senior employees are one of the most likely groups to commit occupational fraud, and cost an organization an average of $853,000 per fraud; it is important to provide a mechanism by which other employees can report fraudulent activity.
* Financial oversight – The Report also considered anti-fraud procedures which were mandated by the Sarbanes-Oxley Act 2002. Many of these procedures have also been adopted by organizations that are not subject to the legislation, but which consider these procedures to be best practices in combating fraud. The implementation of independent audit committees resulted in a 70% reduction in loss to public companies and detection of the frauds occurred 25% sooner than those which did not utilise the committees. Management certification of financial statements saw a 96% reduction in loss for public companies and a 23% reduction for private companies. Independent audit committees and fraud hotlines facilitated the detection of frauds in half the time that it took for organizations without these controls to discover them.