Prevention Is Better Than Cure
Last week I discussed how silo thinking often reflected narrow thinking and blocked the flow of ideas and sharing of knowledge. I also touched on the bigger picture that is emerging through integration and collaboration:
- Governance, risk management and compliance (GRC)
- Independent assurance and oversight
- Combined assurance
- Processes and
- Integrated Reporting.
Another area of collaboration that requires a global effort is that of fighting fraud and promoting anti-fraud awareness and education. This week (14 – 20 November 2021) is International Fraud Awareness week, hosted by the Association of Certified Fraud Examiners. In this annual event, around the globe, hundreds of organizations pledge to increase fraud awareness in their workplaces and communities.
The Fraud Triangle
The Covid-19 pandemic has not only affected us in our personal and business lives. It has also affected the level of fraud and how organizations are tackling it. In these trying times, people are experiencing increased levels of pressure. A lack of adequate and effective governance, risk management and internal controls, can result in opportunities to commit fraud. This is often followed by rationalizations by the fraudster such as “it’s only a loan”, or “I’ll pay it back later”. These three aspects (pressure, opportunity, and rationalization) are known as the Fraud Triangle and explains why people commit fraud.
The Next Normal
The Association of Fraud Examiners (ACFE) in partnership with Grant Thornton, conducted a global survey of anti-fraud professionals regarding the existing and expected effects of Covid-19 on the fraud landscape. Here are some key findings from this report:
- 51% of organizations have uncovered more fraud since the onset of the pandemic
- 71% expect the level of fraud impacting their organizations to increase over the next year
- 38% of organizations increased their budget for anti-fraud technology for the 2021 fiscal year – the most common area for increased investment within anti-fraud programmes
- More than 80% of organizations have already implemented one or more changes to their anti-fraud programmes in response to the Covid pandemic.
As if the pandemic itself was not enough, such a massive increase in fraud contributes to further losses. The ACFE, in their Report to the Nations, estimates that the typical organization loses 5% of its revenue annually to fraud. Losing revenue has a ripple effect – less funds available for salary / wage increases and other employee benefits, increased risk of job losses, increasing pressure to boost business revenue and / or cut costs and massive reputational risk to the business. Reputational risk drives investors away, weakens trust in public organizations and places increased strain on resources.
As a business owner, just imagine what you could you do if you managed to protect that extra 5% of revenue.
So how can you fight fraud?
Fighting fraud is not just the responsibility of top management or business owners. Each employee, regardless of position, can help prevent fraud.
As the saying goes, “prevention is better than cure”. The most cost-effective way to limit fraud losses it to prevent fraud from occurring. Here are some ways in which you can protect your organization:
- Have an established entity-wide code of conduct. Engage your employees and make sure they understand what is required in terms of your code of conduct.
- Conduct fraud awareness training. Free resources are available on fraudweek.com. Just engaging in conversations about fraud and the impact thereof may deter potential fraudsters from acting.
- Establish a fraud hotline where employees, suppliers and customers can anonymously report suspicious activity for further investigation.
- Be alert and know the red flags in the workplace – by recognizing the behavioural clues displayed by fraudsters, you can more effectively detect fraud and minimize losses arising from fraud. Some of these include:
- Living beyond a person’s means
- Financial difficulties
- Unusually close associations with suppliers and / or customers
- Control issues – unwillingness to share duties, reluctance to take leave
- Irritability, suspiciousness, or defensiveness
- “Wheeler-dealer” attitude
- Divorce / family / other personal problems
- Addiction problems
- Past legal problems
- Past employment problems
- Poor performance evaluations
- Excessive absenteeism.
- Have proper governance, risk management and internal control systems in place. Good governance is not only what leaders do. Every person, whether employee or employer, can contribute by focusing on the key basic internal controls that can assist your business / organisation in achieving its objectives and minimizing the risk of fraud:
- Maintain a strong control environment – This includes, amongst others, the attitudes, awareness and actions of directors and management to adherence to laws, regulations, policies, and procedures of the business; effective and economic use of resources; accurate and reliable data and records; protection and maintenance of assets.
- Lead from the top and set the correct tone regarding the importance of adhering to expected standards of conduct.
- Keep your eye on the risks (including fraud risks) facing your department and the organization. Continuously question how the risks facing your operations will deter you from achieving your goal and possibly expose you to fraud related losses. Be proactive in communicating these risks to the Risk Management and Internal Audit Departments.
- Maintain and strengthen your control activities – do not neglect the basics, such as segregation of duties, verifications, reconciliations, and authorisations. Even if the entire workforce may not be on site, this does not mean segregation of duties can be disregarded. Where segregation is not practically possible, consider and develop alternatives, including additional, independent management review over transactions.
- Inform and communicate – maintain open channels of communication. Be clear about what is required from employees and emphasise that internal controls remain critically important.
- Monitor activities – continue assessing risks, whether appropriate controls are operating as required, and report deficiencies.
- Ensure independent assurance and oversight takes place and increase your levels of defence – through boards, audit committees, internal and external auditors, and other assurance providers.
Take a stand!
GrowthSmiths is a proud supporter of International Fraud Awareness Week. Join the global effort today to fight fraud and minimize its impact on society!