According to the survey, U.S. businesses lost about 6 percent of their revenue, or $600 billion, to fraud in 2002. The ACFE asserts that this probably underestimates the true costs because a lot of fraud escapes detection and reporting. But businesses may be able to minimize their fraud-related liabilities by familiarizing themselves with the factors and conditions that often lead to fraud.
Identifying and combating risk factors
Businesses should begin by assessing their baseline risks. Many organizations possess certain intrinsic traits that render them particularly vulnerable to fraud, including:
- The handling of large amounts of cash
- Inventory items or assets that are susceptible to removal and/or resale
- Overly ambitious earnings demands from investors or creditors
- Complicated financial operations
In some cases, there's little a business can do to eliminate such characteristics; a company that manufactures pocket-sized widgets will necessarily carry an inventory of easily misappropriated items. Organizations must therefore develop quick-response plans that they can immediately deploy upon discovery or suspicion of fraud.
The plan should include mobilization of an investigative team composed of a white-collar crime attorney, a certified fraud examiner and a forensic technology specialist, among others.
Recognizing the fraud triangle
Studies indicate that fraud is most likely to occur in businesses where the fraud triangle -- motivation, opportunity and rationalization -- is found.
- Motivation. A perpetrator's motivation may grow out of financial need caused by greed, addiction, gambling, poor investments, business reversals or an extravagant lifestyle. It may be work-related, rooted in employee dissatisfaction or the perception of questionable management integrity. A perpetrator also may find motivation simply in the challenge of outsmarting the system.
- Opportunity. Opportunity represents the only element an organization has any chance of controlling; removing the opportunity may derail potential frauds. Opportunities can come in the form of insufficient job applicant screening, inadequate policies and procedures, overly broad access to information, failure to segregate financial duties and ineffective monitoring of controls.
- Rationalization. Rationalization allows a perpetrator to reconcile his unethical actions with his own values. The perpetrator must be able to neutralize the fraud in his mind and push aside any consideration of the possibility of inflicting injury on others. Employees who hold a grudge against their employer, for example, find it easier to commit fraud based on rationalizations such as, "They don't pay me what I'm worth; I'm only taking what I deserve," and "Management is dishonest, so I can be dishonest, too." Others rely on rationalizations such as, "I'm only borrowing the money and will repay it as soon as I can," "The company doesn't need the money," or "The company can afford to write it off."
Formal anti-fraud programs, including adequate internal controls, can go a long way in preventing and controlling fraud. According to the ACFE survey, the single most effective method of detecting fraud is through a tip line.
The ACFE also recommends internal audits, background and reference checks on employees and applicants, and external audits. Management should develop and implement a clear antifraud policy before fraud becomes a problem, and make the consequences of noncompliance, for both the company and the perpetrator, well known to all employees on a regular basis.
Mari Reidy can be reached at (312) 899-7005 or firstname.lastname@example.org.