Fraud occurs every day all over the world. Some companies take an “it won’t happen to us” approach; others implement controls to try to keep individuals likely to commit fraud from entering the business; and still others outsource the work of combating fraud to external auditors. These tactics and strategies are helpful but are limited. Companies must create lower risk environments for fraud. To do so, organizations first must understand their own corporate ecology — the interrelations between people and their workplace — and tailor controls to the nature of those systems.
Fraud may be as old as civilization itself. Fraudulent activity was mentioned in the Code of Hammurabi, the oldest-known surviving code of law dating to around 1772 B.C. Modern archaeologists often unearth counterfeit coins from cities long forgotten.
As long as there have been opportunities, there have been fraudsters.
Today, in an increasingly interconnected world, digital technologies that enable business to be conducted in the wink of an eye also help disguise the identities and machinations of the people conducting that business, thereby enabling fraud to become vastly more sophisticated and pervasive. Likewise, fraud’s impact — on businesses, stakeholders and entire economies — has similarly magnified.
According to the Association of Certified Fraud Examiners (ACFE), fraud includes:
1. Corruption (such as conflicts of interest and bribery)
2. Asset misappropriation (through theft or illegal diversions of cash or other assets)
3. Financial statement fraud (such as asset/revenue overstatement or understatement)
In its 2014 ACFE survey*, the association estimated that the typical organization loses 5 percent of its revenues every year to fraud, with an average cost per incident of $145,000 among all cases reported. The global loss in 2013 approached $3.7 trillion.
Globally, asset misappropriation represents the large majority of fraudulent activity, comprising nearly 85 percent of the total cases of occupational fraud in 2013, with a median cost of $130,000 per case. Financial statement fraud was rarer — just 9 percent of reported cases involved financial misstatements — but in these cases, the estimated loss per incident exceeded $1 million. Interestingly, two or more of these types of fraud occurred together 30 percent of the time.
According to the ACFE report, the sectors most often victimized by fraud are banking/financial, government and public administration, and manufacturing; within these sectors, the real estate, mining, and oil and gas industries reported the largest median losses. However, it is important to note that fraud differs by region. While billing (financial statement) fraud is the most common in the United States and Canada, in developing economies such as those in Latin America and Asia, corruption is rife. Therefore, companies operating in multiple jurisdictions must take regional differences into consideration when devising their anti-fraud strategies.
In other words, there is no one-size-fits-all approach to combating fraud. Nevertheless, as challenging as this might be, developing a customized approach is crucial. In the most recent ACFE survey, more than half the companies reporting fraud had not recovered any of their losses, and only 14 percent had been made whole. Continue reading here...