Business Fraud– Great Challenge Facing Business: Alarming Trends– Adapt Your Thinking, Take Control, Manage Risk…

Business fraud (or corporate fraud) is one of the greatest challenges facing business and financial institutions, today– it encompasses a wide range of unethical, illegal… practices that business officers, employees, partners… often engage-in… although, not all business fraud is necessarily criminal…

According to Certified Fraud Examiners (CBIA); companies around the world lose an estimated 5% of their annual revenues to fraud… that figure translates to a potential total fraud loss of more than $3 to $5 trillion...

According to Mark Theoharis; while anyone in a company can commit corporate fraud crime, they are typically committed by managers, executives, corporate officers, others in positions of authority within the organization… Business fraud can be difficult to prevent, but by creating effective policies– a system of checks, balances, physical security– companies can limit the extent to which fraud can take place…

According to Didier Lavion; more opportunities brings more risks, which means that business can no longer just focus their fraud prevention and detection strategies on only a few types of fraud… or, just certain fraudster profiles… or, just perceived threats– they must be prepared to cast a wider net because threats associated with fraud are becoming much more creative and growing rapidly… The ‘Institute of Internal Auditors’ conducted a poll of nearly 300 chief financial audit executives– found fraudulent acts by employees and outsiders have substantially risen since the beginning of the recession, and internal auditors predict the trend will continue.

Among the 31% of survey participants from organizations where instances of fraud were detected; 43% report that fraud occurrences increased from 1% to 10%; 28% indicate fraud increased from 11% to 20%; and 14% say fraud increased by more than 20%. Theft of company property, resources, proprietary information (IP), which is the fastest-growing fraud reported by respondents, followed by embezzlement, expense account fraud, third-party–vendor fraud… Fraud within companies is a risk that can never be eliminated, just managed…

fraud1 untitled

The Annual Global Business Fraud Survey: The Economist Intelligence Unit surveyed senior executives from around the world, across a wide-range of sectors and functions. This year’s 901 respondents report that fraud remains a widespread problem regardless of industry or region in which the business operates… also, the infractions are ever-changing and unpredictable, as ever. The results reveal a number of key insights:

  • The incidence and costs of fraud rose markedly in the past year, in turn driving up companies’ sense of vulnerability: According to this year’s survey, the level of fraud increased by every measure, in the past 12 months, reversing recent trends. Overall, 70% of companies reported suffering from at least one type of fraud in the past year, up from 61% in the previous poll. Individual businesses also faced a more diverse range of threats: on average, those hit in the past year suffered, on average– 2.3 different types of fraud each, compared with 1.9 in 2012. The economic cost of these crimes mounted; increasing from average of 0.9% of revenue to 1.4%, with 1 in 10 businesses reporting a cost of more than 4% of revenue…
  • Information-related fraud is common and evolving, but many  companies are not prepared for when things go wrong: Information theft remains the second most common fraud, affecting more than 1 in 5 companies over the past year, and three-quarters of respondents describe their businesses as at least moderately vulnerable. Looking ahead, complex IT structures are the most commonly cited reason for an increase in overall fraud exposure, suggesting there won’t be any quick diminution of the threat… Information theft, like most types of fraud, is typically an inside job… and of those hit in the past year in which the attacker is known, 39% say it was the result of employee malfeasance, which is roughly unchanged from 37% in last year’s survey…
  • Fraud remains an inside job but so does its discovery– fraud is typically carried out by employees within the company: For the businesses that had suffered fraud where the perpetrator was known; 32% had experienced at least one crime and the leading figure was in senior or middle management… 42% in which the incident involved a junior employee… and 23% where it was an agent or intermediary. Similarly, as noted above, employee malfeasance remains the most common driver of information theft. Overall, 72% of those surveyed say that their company has been hit by a fraud involving at least one insider in a leading role, slightly up from 67% last year…
  • Global business practices often increase fraud exposure: Globalization has changed the way business operates. Companies are in search of bigger international markets, while at the same time striving to become leaner. The latter typically involves becoming more focused on areas where they have strategic advantage, and finding ways in others areas through outsourcing, partnerships…
  • Those with local knowledge see fraud risks everywhere: Certain regions have a reputation for high levels of fraud. It comes as no surprise, therefore, that 13% of all      respondents were dissuaded in the past year from operating in Africa, and 11% in Latin America… from their experience or perception of fraud. More striking is the degree to which fraud is keeping companies from making local investments, even in regions where the problem is thought to be relatively well controlled, particularly North America. Even in a globalize world, companies typically invest closer to home. These figures therefore suggest that both the existence or appearance of fraud is a substantial drag on possible new investment, and that outsiders coming in need to be aware of risks even in regions with a reputation for low levels of fraud…

fraud thMIV6DOWG

In the article Business Fraud Shockingly Common by Lev Janashvili writes: A growing body of research supports two conclusions: 1. Accounting fraud represents a foundational threat to market integrity… 2. Corporations, investors, auditors, analysts and regulators are missing ‘low-risk/high-return’ opportunities to implement sustainable, system-wide initiatives; but the evidence often fails to persuade business leaders to take action… As a result, some of the most urgent problems in capital markets persist– not because we can’t solve them… not because we need to examine them more thoroughly… but, simply because we prefer to leave problems unexamined, unsolved…

A long-running pattern of inaction-bureaucratic half-measures continues… Accounting standards are outdated and require  basic change… Instead of confronting them, we often deny their existence, gravity, or vilify sensible solutions that do not align with our ideological biases. This self-defeating dynamic has already produced some ironic outcomes, for example; Too-big-to-fail firms continue to grow, despite worries about systemic risk…  Accounting needs a new conceptual framework and new regulatory and rule-making regime...

fraud Corporate-Fraud-2012-760x428

The PwC’s Global Economic Crime Survey 2014: More than half of U.S. organizations that experienced fraud in the last two years reported an increase in the number of occurrences, representing a continuing upward trend in the occurrence, detection of economic crime. Forty-five percent of organizations in the U.S. suffered from some type of fraud in the past two years, more than global average of 37%…

U.S. companies are growing international operations and expanding the role of Internet and mobile technology in business, which brings risk from beyond their geographic footprint. The survey revealed that 54% of U.S. respondents reported their companies experienced fraud in excess of $100,000 with 8% reporting fraud in excess of $5 million…

According to Steven Skalak; economic crime has become truly borderless threat… The reality of fraud is it impacts a company’s revenues as directly as other competitive businesses and market forces. The risk of bribery, corruption grows as businesses increasingly operate-in, pursue opportunities in high-risk markets… Here are several other issues:

  • Significant Uptick in Cyber Crime: Companies are beginning to change how they think about cyber-security viewing it as a business issue, not just an IT issue. Forty-four percent of U.S. organizations that experienced fraud in the past 24 months suffered from cyber crime; and 44% of all respondents indicated they thought it was likely their organization would suffer from cyber crime within the next 24 months… According to Didier Lavion; corporations need to better leverage and implement the computational and analytical power of cyber-security technologies to help combat the increasing global presence of cyber crime…
  • Who is Committing Business Fraud? As organizations rely more on technology, they increasingly do business in a borderless economy where they are more susceptible to threats from all sides. The results are clear– while companies certainly should not lose  sight of the internal perpetrator of fraud, they need to remain very wary of the external perpetrator, as well… The ‘external’ perpetrator of fraud is closing the gap on ‘internal’ perpetrator of fraud; businesses are reporting that fraudulent crime is committed by external actors (44% of time) almost as often as it’s committed by internal actors (50% of time)…
  • Other Notable Findings: Two types of frauds are committed– accounting fraud and bribery-corruption– increased in 2013… Accounting fraud increased to 23% in 2013, as compared to 16% in 2012. Bribery-corruption, 14% in 2013, doubled from 2012 levels (7%)… For first time, PwC specifically asked respondents about procurement fraud.  The result was stark– more than 25% of the respondents reported procurement fraud (27%), thus immediately placing it as the third most frequent type of fraud experienced by organizations. According to the report, this reflects the increasing interconnection of companies and ongoing trend toward outsourcing more aspects of their businesses…

fraud images

Business Fraud: Oh no… it couldn’t happen to me! This is a very common attitude for many organization when discussing fraud… and it’s time to take a closer look… According to Britni Zandergen; there is a perfect storm for business fraud – and, it’s up to business leaders to put the right processes and systems in place to prevent it. As more companies expand their online business, and as more users share their information– both on and offline, it’s very much easier for fraudsters to get sensitive information…

According to Thomas Donaldson; corporate governance is a hot topic, but companies tend to get overly optimistic about what corporate governance can really do– simply rearranging chairs at the higher echelons of a company will not prevent fraud… For too long, we have followed a mythology that if you write an elaborate code of ethics, appoint people to distribute it, and get everybody to sign-off on a fat-rule-book every year, that this will somehow prevent major disasters… We have abundant evidence that this simply doesn’t work… 

According to Skeel; corporate scandals are not unique, but there is something about the U.S. culture that allows these scandals to happen more easily… there is a fascination with risk-taking, possibly even related to greed… In many other countries, the cultural norms or restrictions on competition… seems to keep these tendencies more in check…

According to Daniel Draz; business fraud is global– where there’s money to be made, benefits to be received, competitive edge to be gained… there’s always fraud… Fraud, abuse… happens in all organizations– and in many cases it can go unnoticed for years– businesses must understand how, where… it occurs– then take practical steps to detect, prevent it… The good news is appropriate measures of prudence and common sense, combined with sound management practices can dramatically mitigate its impact on the organization…