ARTICLE
25 October 2006

Fraud: Prevention Cheaper Than Cure

They say prevention is better than cure. In the world of fraud, it’s less expensive too. Associate director Graham Hain explains how and why.
United Kingdom Accounting and Audit

They say prevention is better than cure. In the world of fraud, it’s less expensive too. Associate director Graham Hain explains how and why.

Fraud On The Increase

Fraud has often been in the news in recent times – whether it’s yet another corporate failure or a new initiative to tackle it. There is a clear message that fraud is on the increase and that it is costing companies more than ever before.

In 2004, fraud in the UK amounted to £15.8 billion, according to figures from Norwich Union and it estimated that most fraud is committed against government, over £4 billion was against the private sector.

Hidden Costs

The damage caused to a company by fraud is not only limited to direct financial losses, but includes intangible costs such as:

  • Loss of shareholder confidence
  • Damage to reputation
  • Loss of customers
  • Missed business opportunities
  • Loss of valued employees.

These hidden cost are difficult to calculate, but the Home Office estimates that it could amount to as much as an additional third of the cost of the direct losses.

Taking Action

Here’s the good news. There are a number of low-cost measures that can be taken to reduce the likelihood of fraud, and potentially save a lot of heartache and money in the long term.

First, businesses should identify an individual in the organisation who is to be responsible for managing fraud risk. This person needs to understand what risks the business is exposed to and develop a plan to lessen those risks. To do this effectively, the individual will need to have an in-depth knowledge of the business and will probably be at executive level.

Responsibility for fraud risk may start with senior management but it should not end there. Every employee should be aware that fraud is not tolerated and that everyone is responsible for fraud prevention and detection.

Creating An Anti-Fraud Culture

One of the most effective ways to raise awareness of fraud risk within an organisation is to issue a Fraud Policy Statement (FPS). The FPS should clearly state that the company requires honest action and that it will not tolerate fraud by employees, customers or suppliers.

To be effective it is vital that the FPS is read, understood and acted upon. From the beginning of their employment, new joiners should be made aware of the FPS and its importance. Ideally, this should form part of the induction process. It is important to set the company tone of zero tolerance to fraud.

Some convicted fraudsters claim that business cultures helped to facilitate their offences. According to findings by Perpetuity Research and Consultancy International. If executives count personal items as company expenses or make lavish gifts to customers, some employees may feel justified in their own fraudulent activities. Remove the justification, and the likelihood of fraud is reduced.

A positive reinforcement tool is fraud awareness training, which is targeted at employees that work in high-risk areas, such as accounts, sales and those with responsibility for cash. Training acts as a deterrent to fraud and can encourage people to identify and report any suspicions.

If awareness training is preceded by a survey of attitudes to fraud, the training can be tailored to an organisation’s needs, with reference to the overall company culture. Other initiatives, such as focus groups and workshops, can highlight what an organisation needs to do to raise the profile of fraud risk amongst its employees.

Take Action Against Fraud

  • Appoint an executive who is responsible for fraud risk
  • Issue a fraud policy statement
  • Vet all new employees properly
  • Monitor employees through regular appraisals and surveys
  • Provide key employees with periodic fraud awareness training
  • Perform a fraud vulnerability review for your company

Prevention Through People

The recruitment process can be a valuable tool in fraud prevention. When recruiting new employees, references should always be taken.

The National Criminal Intelligence Service (NCIS) reported, in 2003, how company owners or senior employees conduct some of the highest value frauds. Clearly, within certain roles, the opportunity to commit fraud is high, so it may be prudent to conduct rigorous checks on such people at the beginning of their employment. The extent of the checking should be proportionate to the position being filled.

Unsurprisingly, debt, addictive lifestyles and greed are also shown to be key factors in the perpetration of frauds. In addition, fraud can occur when employees are under pressure to meet budgets or surpass targets, so it’s important for businesses to monitor employees and recognise the warning signs of stress. The appraisal process can be an effective mechanism for identifying pressures, difficulties and grievances of individual employees.

In Summary

Fraud is big and getting bigger. When it strikes, it is usually expensive, not only in terms of the sums directly involved, but also the knock-on effect to other business areas. Several practical measures can tackle the three elements that create greater risk of fraud: opportunity, motivation and justification as shown in the fraud triangle. Putting these measures into action any organisation – big or small – can significantly reduce the risk of a fraud being committed.

Keeping Risk In Check

To counter fraud, businesses should also ensure that their security systems and processes are scaled with the size and focus of the organisation. A period of growth, diversification or a merger may mean that certain measures are no longer aligned with the risks they were put in place to mitigate.

Fraud vulnerability reviews can highlight both; business areas that have a high likelihood of fraud and those where the impact could be substantial. Internal controls exist to mitigate risks and should be balanced in the context of these two factors of instance and impact. Reviews help organisations to significantly reduce the opportunity for fraud, without creating bureaucracy that could stifle the enterprise.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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