How can we reduce occupational fraud risk?

Organizations are always concerned about fraud risks in their day-to-day business operations. As per the 2020 global study by the Association of Certified Fraud Examiners, organizations across the globe lose 5% of their revenue to fraud, which in fact amounts to trillions of dollars every year. And to make it worse, about half of the victim organizations never recover the losses they suffer due to fraud. The top management in any organization has a fiduciary duty to deter and prevent fraudulent activities to the extent possible. One of the key fraud risks that organizations across the world are concerned with, is the occupational fraud risk. 

What do we understand by occupational fraud?

Occupational frauds are fraudulent activities against an organization by its employees by way of misuse of their occupational position or the organization’s assets and resources. Occupational fraud conducted by employees can include:

• misappropriation or misuse of cash, inventory or other company assets

• corruption or bribery within different business functions or with third parties

• understatement or overstatement of financial statement items 

What are the key reasons for occupational fraud?

Although there are three key reasons for any fraud – Pressure, Opportunity and Rationalization, the most common reason for frauds committed by employees is the opportunity to do so at their work place. The ACFE survey also highlights that the reason for one third of the occupational fraud was lack of internal controls, which in turn means opportunities for employees to commit fraud. The key internal control weakness areas as per the survey are as below:

How can occupational fraud be detected?

Employees usually create or alter fraudulent documents, entries,  physical files or electronic files to conceal their fraudulent activities. And therefore, sometimes it becomes difficult to detect fraud within the daily routine of business. The most common ways to detect fraud are by way of receiving tips from internal or external parties like employees, customers, vendors etc. , audits or investigations conducted by management or third parties, reconciliations, job rotations etc. The top three ways of detecting occupational fraud are: 

What steps can an organization take to reduce occupational fraud?

Most common anti- fraud controls implemented by organizations across the globe

• External audit of financial statements

• Setting the code of conduct

• Reviews including internal audit and management review

• Implementing anti-fraud policies

• Awareness sessions and fraud specific training to employees

• Performing periodic fraud risk assessments and surprise audits

• Developing whistle blower policy and providing hotline or other anonymous reporting mechanisms

• Segregation of duties and periodic job rotations

Does the pandemic and the resultant changes to our work model has any impact on fraud risks?

Of course it has. As per the studies on the pandemic impact world wide, CFOs and CEOs have raised the concern of significant increase in fraud cases over the last one year. About 44% of the survey participants mentioned that they are expecting a further significant impact on fraud risks over the next 12 months as well. Additional areas of importance to consider under the Covid situation:

• The impact of pay cuts, changes in job structure, lay offs etc. on employee morale and integrity

• Significant increase in fraud risks in the areas of cyber security, payment controls, employee embezzlement, identify theft and fraud by vendors

• Increased requirement to invest in anti-fraud programs, investigations and technology

Its always better to be safe than sorry!!! In order to minimize the fraud risks in any organization, it needs to set the right tone at the top, invest in building a proper risk management framework, strengthen the internal controls framework, provide period awareness and training sessions to employees and conduct timely reviews and investigations.