The Association of Certified Fraud Examiners (ACFE) has warned that the economic downturn caused by the COVID-19 pandemic is likely to lead to an explosion of fraud in the coming years. Fraud is a significant risk for organizations of all sizes, in all industries, and in every country throughout the world.
In the ACFE’s Report to the Nations: 2020 Global Study on Occupational Fraud and Abuse, the median loss per fraud case was $125,000, while the average total loss for a single case of occupational fraud in a company was more than $1.5 million. Most organizations can’t afford to wait until they’re hit by such a financial loss to acknowledge and address this risk. There are various ways that management accounting and finance professionals can help their company to detect, root out, and prevent fraud.
“Our research shows that implementing targeted anti-fraud controls can help organizations catch frauds more quickly and reduce the amount of their fraud losses,” said Andi McNeal, director of research at ACFE.
Tips are by far the most common way that fraud is detected. Organizations can take proactive steps to foster tips from individuals who witness or suspect wrongdoing, McNeal said. Part of this includes implementing a strong reporting mechanism that empowers and encourages people to come forward, supports confidential reporting where possible, and provides multiple reporting avenues.
“Raising awareness and educating staff about fraud are equally important in cultivating tips,” McNeal said. “Organizations that provide anti-fraud training to their employees see more frauds detected by tips—and more use of hotlines to provide those tips—than organizations that don’t train their staff on why and how to report.”
In addition, implementing some targeted measures designed to detect red flags indicative of fraud both increases an organization’s ability to uncover fraud faster and lets employees know that the company proactively looks for signs of illicit conduct, which can deter individuals from attempting to commit fraud in the first place. McNeal suggests that mechanisms such as surprise audits; management reviews of processes, controls, and transactions; and the use of data analytics techniques to identify anomalies can all be helpful.
The overlap between ethics, compliance, internal audit, and anti-fraud initiatives is significant. The objectives of these programs, which are often led by a committee or task force, align and reinforce each other as they all seek to protect the organization’s operations, resources, and reputation.
“This group often includes members of the compliance, ethics, internal audit, risk management, corporate security, finance, accounting, and management teams,” McNeal said. “Bringing all of these perspectives together ensures that the conversations and initiatives around the anti-fraud program are balanced, holistic, and realistic.”
ACFE research shows that half of all frauds are directly attributable to controls breakdowns—with nearly one-third due to an outright lack of controls and 18% due to an override of existing controls. Anti-fraud controls play a vital role in protecting an organization’s assets.
“There are numerous steps companies can take to evaluate their controls, including process walk-throughs, submitting intentionally problematic transactions through the system to test whether they are caught, and conducting full audits of the controls,” McNeal said. “An efficient means to ensure anti-fraud controls protect the company is to adopt a risk-based approach to design and implementation—conduct regular, comprehensive assessments to identify where the company’s biggest fraud risks are in terms of likelihood and potential impact.”
The results of these assessments provide a valuable tool in designing and implementing targeted anti-fraud controls, as well as determining appropriate ways to test them. For example, if the fraud risk assessment results indicate that the risk of employees colluding with vendors to manipulate the purchasing function is high, then the controls in that area should be adjusted accordingly, McNeal said.
“Controls gaps commonly appear in the wake of changes—such as staffing turnover or reductions, process changes, or the implementation of new technology—so the risk assessment and controls evaluation processes should be revisited periodically.”
FRAUD RISK
Operations and accounting were the two most common departments in which fraud occurred (representing 15% and 14%, respectively, of all fraud cases, with 5% coming from the finance department). ACFE research shows that financial statement fraud presents a significant risk in terms of total potential financial impact. But just 10% of the occupational fraud cases examined in ACFE’s study involved financial statement fraud, while 86% included the misappropriation of company assets and 43% involved corruption. In accounting and finance, the most common schemes involved billing fraud, check and payment tampering, and corruption.
Understanding the schemes most likely to be committed helps with designing appropriate controls and monitoring activities. Be aware of the behavioral warning signs and pressures that might lead someone on your team to choose to engage in fraud. ACFE research shows that 85% of all occupational fraudsters display at least one red flag during the time of their scheme—living beyond their means and experiencing financial difficulties were the most common.
“While these situations alone certainly don’t mean that an employee is committing fraud—or even is considering it—they are factors that managers should be aware of as they assess the potential areas of fraud risk on their teams,” McNeal said.
ANTI-FRAUD PROGRAMS
The importance of management promoting ethical behavior and discouraging fraud can’t be overstated. The ACFE report shows companies that implement a code of conduct and provide anti-fraud training, have a reporting hotline, and proactively search for warning signs lose less to fraud than those that don’t. The percentage of companies implementing these targeted anti-fraud controls has steadily increased over the last decade, the ACFE found, indicating that more see the value in investing in these mechanisms.
IMA ETHICS HELPLINE
For clarification of how the IMA Statement of Ethical Professional Practice applies to your ethical dilemma, contact the IMA Ethics Helpline.
In the U.S. or Canada, dial (800) 245-1383. In other countries, dial the AT&T USA Direct Access Number from www.usa.att.com/traveler/index.jsp, then the above number.
The IMA Helpline is designed to provide clarification of provisions in the IMA Statement of Ethical Professional Practice, which contains suggestions on how to resolve ethical conflicts. The helpline cannot be considered a hotline to report specific suspected ethical violations.
July 2020
