Companies blind to fraud costs

Despite 'checking the boxes' and installing the latest systems, companies are still ill-equipped to combat fraud and counter its far-reaching effects, says Jaco de Jager, CEO of the Association of Certified Fraud Examiners (ACFE) - SA Chapter.

De Jager cites staggering local fraud loss statistics - over R657 billion was lost to tender fraud in the past six years, with fraud in 2011 alone causing losses of over R3.5 billion in the financial sector, R6 billion in the short-term insurance sector, and over R6.8 billion in the medical sector.

“Fraud costs companies billions, but its impact reaches employees and consumers, too,” says De Jager. And yet, it keeps happening and companies appear ill-equipped to prevent it. In many cases, they do not know exactly what criminal and occupational fraud is costing them.

It is estimated that around 64% of fraud is committed internally, but this figure may be as high as 80%, depending on the type of business.

A significant proportion of corporate losses due to fraud are the result of corruption, misappropriation and mismanagement; staff pilfering and a false sense of entitlement to perks; and theft of office supplies, De Jager says.

For example, staff may feel that taking home office stationery for their children does not constitute fraud. Or they may be entitled to a meal allowance on a trip, but don't use the full allowance, and may claim to the full value of the allowance anyway. “People don't realise this is also fraud, and it costs companies money and ultimately impacts on staff and customers,” he says.

Smaller companies suffer the biggest losses, says ACFE. The smallest companies suffer the largest median losses, partly due to the fact that they typically employ fewer anti-fraud measures.

Technologies such as biometric access control may help to counter fraud, De Jager says, but they will only be effective if used as part of a comprehensive system. “For example, an employee might open a door using his fingerprint, but may let in three or four other people while the door is open. If there's no surveillance camera noting this, or nobody monitors this access, those people could steal expensive equipment and nobody would know where it went.”

De Jager highlights the global ACFE 2012 Report to the Nations research findings. “IT only identifies around 0.8% of fraud in SA. What's just as shocking is that external auditors only pick up around 4% of fraud. The most successful anti-fraud measure is still anonymous tip-off lines. In Africa, 54% of all fraud comes to light through tip-offs,” he says.

“Staff are our biggest fraud risk, but also our best fraud prevention system,” De Jager says. “When staff are correctly educated and understand the need for accountability, they know what to look out for and become an effective monitoring system.”

Fraud is often characterised by certain behaviour, says De Jager. “For example, staff may be reluctant to take leave, or may turn down a promotion in order to stay in the position where they are able to commit fraud. These are red flags to those who have been trained to look out for them.”

These 'red flag' behaviours are important because most perpetrators of fraud within companies do not appear to be suspicious characters on the surface. The ACFE 2012 report notes that 77% of all fraud in its study were committed by individuals working in one of six departments: accounting, operations, sales, executive/upper management, customer service, and purchasing.

In addition, most occupational fraudsters are first-time offenders with clean employment histories. Approximately 87% of occupational fraudsters had never been charged or convicted of a fraud-related offence, and 84% had never been punished or terminated by an employer for fraud-related conduct.

In addition to training and increasing staff awareness to counter fraud, De Jager says having a certified fraud examiner (CFE) is critical to stemming the tide of fraud. In SA, he says, there are only around 600 CFEs. Ongoing training is necessary to increase this skills pool, he says.

“With a lack of capacity and skills, companies will not know how to identify suspicious behaviour. Their IT systems may well be identifying the fraud for them, but if they do not understand how to interpret the information, they may still miss it.”

And more needs to be spent on combating fraud, he says. “We may spend millions on combating fraud. But the fact is that fraudsters spend billions on committing these crimes, because there are multiple billions to be made from it.”

De Jager will address the upcoming Ideco IDentity Indaba on the cost of fraud. For more information on this event, click here.