Human Weakness or Corporate Failing?

In today's business environment, fraud is prevalent within most organisations – whether it is relatively minor expense fraud of claiming an extra five pounds on a taxi fare or a gross accounting scandal which runs into millions. Fraud is not something that will disappear and anti-fraud policies and technology can only help work towards reducing the risks, rather than eliminating it completely.

Unfortunately, as with many business processes, humans are the main weakness in the chain, or rather, temptation and human weakness are to blame.

THE CORPORATE FRAUDSTER

Stealing from one's employers is often viewed as the bastion of the lower, dissatisfied employee who uses fraud to supplement the low salary they receive – but this is somewhat of a misnomer. Though is is true that successful fraud is generally committed by those who know the system, know its flaws and know how to exploit them.

Most people won't go looking for ways to commit fraud, instead they stumble across a means to commit it undetected and the temptation is too great. Granted, one has to be of a certain character to abuse these weaknesses, but there is definite fault in the policies and procedures that allow this to happen.

The average corporate fraudster is a male member of senior management, between the ages of 36 and 55, has worked for the company for over six years, and commits numerous offences over a five-year period before they are caught.

Interestingly, most are caught following whistle blowing, rather than internal controls catching them out. In fact, it is often because the internal controls are not robust enough that the fraud has been able to be committed.

WHISTLE-BLOWING ON FRAUD

By the time a fraud is identified and investigated, it is often the case that suspicions had already arisen among other individuals, but these suspicions were not acted upon.

Fraud can thrive in an organisation which has a culture of 'somebody else is bound to act upon this'. This ethos can work from the top down. From the sales director who doesn't care as long as his targets are met, to the FD who hasn't checked the reports that he or she has signed off, or a person on the front line not following up on suspicious behaviour because it isn't their problem once they hit 'send'.

For employees at all levels of the organisation to be alert to the possibilities of fraud changes must come from the board. It may seem like an obvious instruction, but senior management must inform their staff of why they are doing this. Giving an employee a meaningless order does not instil dedication. Setting the scene and explaining motives is more likely to result in adoption of new processes.

It is rather shocking that 5% of an organisation's turnover is lost to fraud. And while it may be a trite adage, stealing from the company is stealing from everyone who works there and the shareholders.

UNDER SUSPICION, ABOVE QUESTION

Enron is the poster child for serious fraud and a prime example of senior management abusing their status within the organisation. It is imperative that when an anti-fraud policy is put in place, consideration is given to the procedures for reporting suspicions.

Just as some employees may not care enough to alert management to fraudulent activities, some may care too much and not wish to rock the boat, especially if it is their senior who is committing such offences.

A robust whistle-blower policy should not go through management at all, but should be reported straight to the senior director.

THE SOLUTION? CONTINUOUS MONITORING

Continuously monitoring the transactions that run through an organisation is the most comprehensive way to tackle fraud. Relying solely on sample data in quarterly or annual audits is a flawed practice as anomalies can be overlooked. The increased workload also offers little time to investigate.

In a recent survey of 60 audit and financial executives, 29% said that an anomaly could go unnoticed in their organisation for more than six months. More worrying is that 42% didn't know how long it could go undiscovered. Best practice advocates a process whereby potential cases of fraud (or error) are probed as they occur, which will result in a reduction in fraud.

Identifying data irregularities and highlighting them to the appropriate individual within the organisation who can investigate the query fully is a large and complex task requiring specialised technology to effectively review each transaction.

Monitoring must not be limited to simply investigating large payments to unknown suppliers. To be truly effective, every transaction needs to be included and there are many tests to consider. For example, that a supplier's invoice address does not match that of an employee's, that the person who raises the purchase order is not the person who approves the transaction and, likewise, employees should not be able to approve their own expenses bills or pay rises.

Since people committing fraud rely on the large volumes of transactions that flow through the enterprise to hide their transgressions, continuous monitoring is an effective anti-fraud measure because of its comprehensive review of all automated financial transactions.

MANAGING HARSH REALITIES

On par with the decline of the 'job for life' is a decline in company loyalty. One could draw parallels with the rise in inflation and cost of living affecting the moral conscience of the potential fraudster, but many of the high-profile fraud cases that are in the press today are committed by already wealthy individuals.

Greed does not discriminate between social class and economic standing, it is a temptation and human weakness which will always be present. As such, organisations must accept this and craft procedures and controls to minimise the opportunities for unscrupulous individuals.

Ultimately, every fraud leaves a trail of some description. If this trail can be automatically picked up on in the early stages, the perpetrator can be exposed quicker, reducing monies lost. Once a payment has been made, the chances of a total recovery dwindle to 50% to 60% and the cost of recovery can be significant. But in order for such technologies to be effective, there has to be complete buy-in from the board. There is little point investing in a system which highlights irregularities if they are not investigated.

Anti-fraud policies must accompany the technology to provide all employees with a clear set of rules and guidelines for reporting suspicious or fraudulent behaviour. Taking decisive action against fraud will reap rewards in both economical and morale terms, but only if adopted as part of a comprehensive anti-fraud strategy.