Fraud. It is a word that grabs the attention of us all. We stop typing, put our pens down, and listen intently for the juicy details that are sure to follow. The mere mention of the word can scare even the best of us, but what exactly is fraud?
Fraud is a white collared crime that is defined by Black’s Law dictionary as: “A knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment.”
In other words, fraud is the deliberate act of harming another by unfair means. There are many types of fraud. One type is internal or occupational fraud. According to the Association of Certified Fraud Examiners (ACFE), “… this type of fraud occurs when an employee, manager, or executive commits fraud against his or her employer.” The ACFE reported in 2020 that the average occupational fraud costs companies $1.5 million dollars and lasted about 14 months before being uncovered. It is estimated that organizations lose 5% of revenue each year because of fraud.
The fraud triangle is the most widely accepted model used today to help explain why a criminal commits occupational fraud. Created by David R. Cressey, this model is based on the theory that three factors, when all present, can lead to fraudulent behaviors – perceived pressure, perceived opportunity, and rationalization. According to the ACFE 2020 global fraud study, 26% of occupational fraudsters were experiencing financial difficulties and 42% were living beyond their means at the time their fraud schemes were uncovered. Though an organization may not be able to control the perceived pressures or rationalization of an employee, they can mitigate the opportunity.
By being proactive and managing its risk, a business entity can reduce the opportunity to commit fraud. Identifying, assessing, and managing fraud risks starts at the top. The board of directors, management team, and top personnel of any organization should promote an anti-fraud culture. This includes implementing policies and procedures, promoting fraud awareness, integrating a framework of internal controls, and leading by example.
All personnel should be properly trained in the entity’s policies and procedures, know the significance of them, and be aware of the consequences if not followed. Knowing their actions can result in a possible adverse effect can be a deterrent in and of itself. The entity should have an open-door policy in which employees feel safe to report suspicious behavior to their supervisors. Hotlines allow personnel to report issues anonymously. Communication is key. The ACFE 2020 global fraud study stated, “43.0% of occupational frauds were detected by a tip.”
An integrated framework of internal controls provides reasonable assurances of the effectiveness and efficiency of a company’s operations, reporting of the financial information, and compliance to the laws and regulations. Under the Public Company Accounting Oversight Board Auditing Standard No. 5, auditors are required to form an opinion on the effectives of the internal controls.
But what happens if an entity’s anti-fraud measures fail? How do you know if fraud was committed? The answer is in the numbers.
Numbers do not lie, which makes them a great source of information. They can help tell the true story of what happened. In “The Fraud Examiner,” Peter Goldmann states, data analytics is “the practice of assessing bodies of business data to identify potential indicators of fraud.” A practitioner gains valuable insight into the true nature of the events in any matter by observing number patterns, trends, and cash flows. In our practice, we often hear our client say, “Show me the money!” Analyzing the raw data helps us do just that.
Data analytics and asset detection is essential in uncovering fraud and proving a crime has occurred. Hiring an experienced accountant that has a background in fraud and forensics can be instrumental in determining losses from any type of fraud schemes. An expert can uncover millions in assets and help rectify the intentional harm that was caused.