Dealing With Fraud Risk

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According to KPMG’s Fraud Barometer, 2009 saw 123 cases of serious fraud by employees and managers, the most since the barometer began 22 years ago. Crimes carried out by managers accounted for £335 million of losses and employees committed £232 million of fraud last year. The same year, the City regulator The FSA handed down record fines of nearly £35 million as a result of a range of offences, but interestingly some involving failure by financial firms to guard against employee fraud.

Fraud at work comes in different forms. It includes activities like employees and managers stealing money or merchandise on the job, falsifying invoices, falsely claiming expenses, misusing company credit cards or redirecting computer fund transactions. Employers need to understand why employees and managers commit fraud. Is it because of:

# Personal financial problems/ struggling with debt.

# Dissatisfaction. The more dissatisfied an employee is at work, the greater the chances that he or she is tempted to commit fraud. For example, if an employee feels he or she is not compensated fairly, he is more likely to steal money or merchandise on the job to balance the scales.

# Pressure. The demands of work or personal life exerted on employees can also cause them to commit fraud. In the case of work, take for example a high-flying city trader. His compensation is based on the amount of profit he makes on his trades. Because of volatility in the global financial markets, for example, one event or piece of news can wipe off all his profits. In that regards, the trader is tempted to commit fraud to cover up for all his losses.

Pressure to live a high quality life beyond our means can also cause employees to commit fraud. The desire to possess expensive cars, clothing, houses etc and enjoy flash holidays can actually push an employee or manager to committing fraud. Sometimes it could be that a loved one or friend is very ill and there are no financial resources to pay for the treatment. People are then forced to commit fraud to meet this need.

# Inadequate control systems at work. Some smart employees might just commit fraud because they saw a window of opportunity to do so even if it was not their intention in the first place. An example is the case of Jerome Kerviel, a former French trader who was charged in 2008 for committing 5bn euros fraud whilst woring for Societe Generale. According to the facts of the case, Jerome joined the bank in 2000 where he moved from the back office to become a junior trader in the dealing room. His experience in the back office, where millions of trades are processed, enabled him to manipulate the computer systems to commit fraud and hide his losses.

Although Kerviel did not personally profit from this fraud, it just shows that where internal controls are not monitored and there is too much focus on profits, employees will take advantage of that and manipulate the whole system with the employer left to clear the mess.

Having established why fraud might take place, employers will then need to look at the red flags. Some of the red flags that might lead to detecting fraud include:

# Noticeable change in lifestyle or wealth: Has the employee all of a sudden bagged himself or herself some nice goodies especially if they haven’t won a lottery or got promoted at work?

# Change in spending habits: Is the employee now spending extravagantly than before?

# Longstanding financial difficulties: If the employee has longstanding debt or other financial obligations that you are aware of, how is he or she copying in meeting those committments?

# Change in work habbits raising questions: Is the employee overly protective of his work, documentation or computer system? Is the employee spending much of his or her time alone?

# Increase in personal problems for example legal cases: How often does the employee take time off to attend legal hearings or use the office address to receive personal letters? Does the employee have a past criminal record?

# Weak code of ethics at work: Is the employee always questioning the best approach to work? Is he always trying to work his own way and beat the system?

After identifying the root causes and symptons of fraud, the next stage is implementing fraud prevention and detection techniques. Below are some considerations that might be useful to your organisation:

# Conduct training in fraud awareness. Employees need to know what constitutes fraud.

# Establish a reporting system which allows for reporting of unethical behaviour and whistleblowing.

# Ensure continuous improvement of internal systems and controls. For example having multiple signatories on big financial transcations or sharing responsibilities when it comes to purchasing.

# Promote ongoing risk assessment within the organisation. This will help identify problem areas not identified before.

# Develop a sound ethical culture which is comitted to reducing the risks of fraud.

# Check and screen both long-serving and new employees.

# In addition to the Code of Ethics, have a Fraud Policy which details how a detected or suspected fraud case will be dealt with. Every employee should be aware of the existence and contents of this policy.

Fraud risk management should be part and parcel of the overall strategy of the business. The earlier the risks of fraud are detected and dealt with, the better. As the old saying goes, “Prevention is better than cure”, it is better to act now than later. By the time the Enron Executives were caught, it was already too late resulting in the collapse of the giant energy company, Enron Corporation. The same happened to Barings Bank. The actions of only one man, Nick Leeson, brought the once regarded, “Personal bank to HM the Queen” to its knees.

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