AN ACTION PLAN TO REDUCE CORPORATE FRAUD

By Darrin Carmichael

The information highway has evolved and given rise to a world of opportunities through the internet, enabling communication and marketing channels such as e-Business, e-Commerce, e-Learning and Government. The same technology that is available to legitimate businesses, however also provides the fraudster with new opportunities. Add to the list the problems created by extortionists, kidnappers and petty criminals and it is surprising business gets done at all!

Recent surveys have shown that:

• major fraud now afflicts one in every five organisations

• on average U.S. Organisations lose about 5% of their annual revenue to fraud

• the median loss caused by fraud in a 2006 study was $159,000. with approx. one quarter suffering losses of $1M and nine companies had losses of $1B and more.

• The median length of a fraud scheme from the time it began to detection was approx 18 months.

• The amounts involved are so staggering that they are difficult to grasp. The report has estimated that Occupational fraud costs the U.S economy as much as $652 Billion per year.

**Source - The Association of Certified Fraud Examiners in their 2006 Report to the Nation

For Trinidad and Tobago, I suspect the ratios are not much different. It is also likely that losses each year from fraud are five times the losses from burglary, retail crime and robberies combined-to give you an idea of its magnitude.

THE VICTIMS

Detection of fraud is usually hit-or-miss and many cases are discovered by accident. Most are not at all sophisticated and could be prevented by simple improvements in management and accounting controls.

No-one is immune, with all sectors of commerce and industry, and all sizes of companies, at risk. Its victims (shareholders, employees, and pension fund investors) are too often unaware of the crimes or of the losses they suffer. But perhaps most injurious of all are the hidden repercussions - the insidious loss of trust and business confidence, the erosion of corporate morality, and the just-plain-embarrassment of being the victim of a scam and the laughing stock of your competitors. Since many organisations are reluctant to shout from the rooftops when they get scammed, there is often little chance of prosecution.

The simple fact that revenues lost through fraud, is profit lost. Companies now have to work twice as hard to generate enough sales to replace that lost profit.

THE FRAUDSTERS

There is a growing trend for the perpetrators to be employees including middle-ranking managers in the companies defrauded. But why is corporate fraud becoming so widespread? There appear to be a number of elements at work:

• Respect for the law has lessened throughout society.

• Corporate loyalty and job security are increasingly rare.

• Fewer layers of management, reduce levels of control and supervision. Downsizing creates resentment and fear, which in turn nourish fraud.

• Empowerment of employees gives them greater opportunity to defraud.

• Information technology helps to make crimes quicker and easier, and the sums involved much larger.

All this to say, that the picture is not all black. The great majority of us are as trustworthy as we ever were. Indeed, our best defence is to harness this inherent honesty to create an anti-fraud culture within our companies. Individuals must be encouraged to be alert to any transgressions by their colleagues. There must be clear and readily available reporting channels for them to report any suspicions.

Bosses must be the vanguards, and then allocate the necessary resources. Senior managers must then follow the same rules set by them for the humble workers! Corporate standards of behaviour will always reflect the example set by management.

Allegations of fraud or other wrongdoings by employees or third parties must always be fully and fairly investigated and disciplinary action taken against offenders.

There must be clearly defined individual responsibilities for security and crime-prevention, especially for line managers and those staff in positions of greater trust.

A range of standard security controls and countermeasures need to be put in place and enforced. The majority of staff will be happy to follow rules and procedures if they understand them, and can see the benefits of them. For example;

• all transactions must be authorised and figures regularly reconciled

• activities should always be traceable to individuals

• clear audit trails must be maintained and inspected

• no individual must be given sole responsibility for any complete payment cycle

• all sensitive tasks must be split between at least two people to prevent collusion

• there must be firm control over access to systems and data

• always enforce discipline over computer passwords

• physical security must be tight and sensitive areas segregated.

Methods may have been adapted to the age of technology, but the scams are as old as money itself. Fraud prevention will always cost much less than fraud itself. Act NOW!