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Fraud investigation | The Enemy Within: Investigating Internal Fraud

Fraud investigation | The Enemy Within: Investigating Internal Fraud

Economic crime in South Africa is at an all-time high and fraud scandals are among the top concerns. According to the PwC global economic crime survey, 77% of South African companies reported experiencing economic crime in 2018. With 49% of all fraud being internal fraud cases it is difficult to underestimate the significance of this crime. But what exactly is internal fraud and how can you protect yourself from becoming another statistic?

What is Internal Fraud?

Fraud is defined by Oxford as ‘wrongful or criminal deception intended to result in financial or personal gain’. Internal fraud or occupational fraud schemes are especially pervasive as they often involve multiple perpetrators causing the damage to be more widespread. Due to the white-collar nature of fraud cases, they are often perpetrated by highly educated individuals (such as senior management) and are well-organised and extremely well hidden.

Although cases do occur where millions are defrauded from companies in one fell swoop it is often the case that smaller amounts of money are defrauded over long periods of time. In fact, the average duration of fraudulent activity going unchecked is 18 months and the most common types of internal fraud include asset misappropriation, accounting fraud and payroll fraud.

 Why is Internal Fraud Destructive?

Internal fraud is difficult to recover from for three main reasons: financial damage, reputational damage and employee loss. A study conducted by the Association of Certified Fraud Investigators found that 23% of employee fraud cases resulted in a minimum loss of R14 million. 

Reputational damage is a double-edged sword. On the one hand, customers lose trust in an organisation after hearing about criminal activity and turn towards the company’s competitors. On the other hand, fraud or even suspicions of fraudulent activity is likely to make potential investors who are looking to make strategic alliances more hesitant to work with a company.

Instances of corporate misconduct are like a wrecking ball to employee morale. Many highly skilled employees may be forced to leave to mitigate the risk to their personal reputation or because they are simply embarrassed to be associated with an unethical organisation. This puts the organisation in a situation where they have a skills deficit and a very small hiring pool to choose from.

How to Prevent Internal Fraud.

Vet Potential Employees Thoroughly.

Astonishingly, many fraudsters have a history of economic crimes that are only discovered after they have been hired. Hiring someone with a criminal record is easily preventable and the importance of screening in the hiring process should not be underestimated. Asking a potential hires previous employer if they had any concerns with that person’s ethics is a good way to gain insight beyond a resume.

Educate Staff on the Risks of Fraud

Making sure every employee understands the risks, both to the business and to their personal reputations, associated with committing fraud is essential. Ensuring that your employees know that there is a safe and anonymous way to report suspicious activity is imperative. Studies show that companies that have well-structured internal tip-off processes saw an upsurge in the detection of fraud by 14%.

Set-up Structural Internal controls

Segregating duties and access to financial accounts and ensuring no singular person has control over a company’s financials has proven to be extremely valuable in reducing the opportunity for fraud. Whistle-blower programs where employees can safely go to report wrongdoing by their peers are instrumental in detecting and persecuting cases of internal fraud. Being vigilant when it comes to behavioural indicators is also important. People living beyond their means, having financial difficulties and refusing to take vacation time may all point towards criminality.

Technology

Technology is an amazing tool and using data analytics to detect criminal activity has proven to be very efficient. However, experts warn that technological controls alone are not enough to protect your organisation. There is a balance that must be struck between technology and the promotion of honesty within a company to successfully prevent fraud.

What to Do if you are a Victim of Internal Fraud  

Assess the Damage

Financial crimes are often extremely complex and hiring the correct experts to assess the damage without tipping off the perpetrator is essential to any investigation. Forensic accountants and certified fraud examiners are trained to detect if a company is vulnerable to potential fraudsters and to collect evidence in a manner that does not jeopardise the investigation.

Respond Correctly

In fraud cases, early response is particularly important, and it can have several implications for the rest of the legal process. If the investigation process is done incorrectly, criminals may be presented with the opportunity to destroy evidence. 

Additionally, the mishandling of information can destroy its value in court and cause avoidable reputational damage if it is accidentally leaked to the public. Information on incidences needs to be gathered in a confidential, systematic and efficient manner for a successful investigation to take place.

Have a Fraud Response Plan

A fraud response plan should be detailed and written in accessible language. The plan should explain how employees should report suspicious activity and clearly state the contact numbers for service providers and internal support departments, such as legal, corporate security, lawyers, police, forensic accountants and investigators.

Conclusion

Due to their invisible nature and their propensity to be committed by middle to senior management incidences of internal fraud can be extremely difficult to prevent, investigate and prosecute.  Understanding what internal fraud is, the common types, the length of the average case and the average profile of the perpetrator are all essential to informing how to construct internal controls to safeguard your business. Early detection and professional investigation are paramount in mitigating the damage that internal fraud can do to an organisation. 

To learn more about how our forensic accountants can help you assess your organisation’s vulnerability to fraud or for more information about our services visit our website at www.gridfa.com.

Forensic accounting: Expertly Navigating Risky Business

Forensic accounting: Expertly Navigating Risky Business

It seems that wherever there is money, there is bound to be complications. Ask any experienced entrepreneur and they will tell you that running a business is no walk in the park especially when it comes to economic crime prevention. Business financials can quickly become extremely complex and understanding them thoroughly is essential to protecting yourself and your business from financial crime. 

According to the Global Economic Crime and Fraud Survey, economic crime in South Africa has reached pandemic levels. Unfortunately, to most of us this is not news. The 2018 survey found that 77% of SA businesses have experienced some form of economic crime in the past 2 years. Making South Africa the country that reports the highest rate of economic crimes in the world.  Forensic accountants play a pivotal role in making sure that these cases are prosecuted and that these criminals are brought to justice.

Forensic accounting is a specialised type of accounting where financial analysis, investigation and auditing come together. Forensic accountants analyse financial data in order to produce a thorough examination of a business or individuals’ financials. These accountants are specially trained to carefully comb through financial data in order to prevent, detect, investigate and report inconsistencies related to criminal activity.  

Forensic accountants need to be analytical, patient, persistent, curious and extremely attentive to detail. The analyses and reports that they produce are often used as evidence in legal proceedings to explain the nature of a financial crime. 

There are two main types of forensic reports that a forensic accountant can produce:

A pre-report assessment 

Which is an assessment that highlights the outstanding information that is needed for a in depth forensic accounting report. It is a high-level review of the available financials and serves to identify any irregularities and matters that require clarification. This report informs the next steps to be taken in order to have a full forensic accounting report compiled. 

A Forensic accounting report

These reports can be presented to an actuary for final calculations to be made, as evidence in court or used in conjunction with a charted accountant’s testimony. From this analysis instances of fraud, corruption, bribery and extortion can be identified. In the case of fraud, it becomes the forensic accountant’s duty to find out exactly what happened, how the incident played out, who is responsible for the crime and what could possibly be done to fix the damage.

Forensic accountants do more than criminal investigations. They also make projections about the future performance of a business.  They do this by looking at the historical profitability of a business and the expansion that took place within that business to extrapolate the growth potential that that business has. 

Technology is playing an increasingly large role in the world of forensic accounting. Advanced software programs mean that accountants are now able to examine far larger amounts of data and produce more accurate results than would have ever been possible by manpower alone. As an additional bonus, thanks to the efficiency of these programs accountants are able to produce results quicker and for less money than ever before.

There is no doubt that navigating the complex world of business is tricky and full of pitfalls. Hiring an experience, ethical and credible forensic accountant can ensure that you are protected against fraud. The use of computer technology has made the processes involved in data analysis quicker than ever before.

Corruption Prevention: A Private Solution for a Global Problem

Corruption Prevention: A Private Solution for a Global Problem

Corruption Prevention: A Private Solution for a Global Problem

In recent years there has been a significant shift in the perception and acceptance of corporate misconduct. Having once been treated as a rather trivial offence, corruption is now seen as a serious criminal act and many international corporations are being sued for their corrupt practices. However, despite heavy fines and jail sentences, corruption persists.

In an ideal world, the responsibility to stop corruption would be shared between the private sector, civil society, and governmental institutions. Fighting corruption on all three levels is essential if we are to eradicate corruption entirely.  However, in the real world, private companies need to take charge and focus on what they can do from within their organisations to prevent and fight corruption. 

Internal Measures to Prevent Corruption 

The single most important step companies can take to successfully fight and prevent corruption is to create and implement a well-structured compliance system. Building your reputation as an ethical and compliant business entity becomes a competitive advantage in the international market where the environment is still corrupt, as consumers are actively looking to spend their money at cleaner businesses. Unfortunately, the misconception that corrupt practices are normal, and therefore right, is an idea that persists in the international market.

Below are the guidelines set out in the UN global compact anti-corruption programme to help companies to easily design and implement a tailored compliance system that is viable for all companies from SMEs to some of the world’s largest corporations.

1. Commit

A company must make the conscious decision to commit itself to contribute towards a corruption-free world. The first step in making this commitment is for the owners of a company to have an ethical sense of the damage that is being done to the world through corruption and feel obligated to play an active role in stopping it. 

Owners need to be publicly dedicated to an ethical model of business and display an ethical and moral standard that inspires their employees. Leading by example and displaying a strong commitment to ethical practices will inevitably filter down the business and ultimately informs the decisions and actions of its employees and helps to create an ethical corporate culture. 

2. Assess 

Risk assessment is at the heart of any corruption prevention programme, but it is especially important for small to medium size companies. Normally SME’s don’t have colossal budgets to dedicate to anti-corruption efforts and as a result, need to focus their money on the areas that are most important. Conducting a risk assessment will help to pinpoint these areas and allow organisations to use their money more efficiently and to focus on the issues that really matter to the company. 

There is not a one-size-fits-all risk assessment for all companies because every company is unique and will face different risks. Risk can come from external factors such as doing business in a country that has poor law enforcement or from internal factors such as having a sales department with a large budget and poor oversight. 

Once the risks have been identified they need to be ranked in order of the most severe to allow the company to focus on working only on the most  important risks. Only after the risks have been examined and strategically prioritised can a business start to design and take measures to eliminate them or minimise them. 

3. Define

When developing an anti-corruption compliance system, you need to define all the practical elements that will be needed for successful implementation. Anti-corruption compliance programmes often have many different moving parts including employee training, business partner training, setting up policies and procedures, defining monitoring controls and many more. 

Once again, how you identify these elements will really depend on the risks you are facing as an organisation. A risk assessment can be broken into 4 stages: 

  • Interviewing the key stakeholders to check for bribery risks and red flags
  • Checking for issues with compliance in the past and figuring out why they happened and how to prevent them
  • Examining audit reports by both internal and external sources for signs of non-compliance in certain areas 
  • Checking the broader legislative trends to get an understanding of the outlook towards corruption your country has.

3. Implement

In the past, the implementation of a compliance programme entailed educating staff on written policies created to address compliance issues through training and that was the end of it. If there is one thing that the constant bombardment of corruption scandals in the news has taught us it is that this approach is not enough to curb corruption. 

Implementation has been redefined to encompass more than just the rolling out of a compliance programme.  Successful implementation also means being aware of whether the policies that have been put in action are working or not. For a programme to be effective it needs to be embedded into the everyday business practices of a company. 

Corruption often happens at the forefront of a business and because of this to implement a successful programme all divisions of a company need to be involved. Each division should take equal responsibility for making sure that there are no bribes being paid or accepted by anyone in their department. 

4. Measure 

Between a year and 18 months after implementing a compliance programme it is time to check-in and measure its efficiency. Setting up compliance programmes can be expensive and resource intensive. It is important to get feedback on the programme to be able to make informed adjustments. This means measuring if the programme has reached its employees. One way to make this step easier is to make use of compliance software to keep track of your programme.

When it comes to measuring the efficiency of a programme two questions need to be answered. First, are the new regulations being followed by the employees? And secondly, are the new measures still up to date? Over a period of 12-18 months, new companies in new countries may have been acquired with different compliance laws, and as a result, a company’s risk profile may have changed.   

5. Communicate 

Communication is extremely important in implementing a compliance programme. Management needs to communicate which compliance measures the company has taken to its employees and why they are necessary. Without effective communication, employees won’t know what to do or why they must do it. You need good communication from top and middle management to create a compliance culture.  

It is not simply because it is the law that companies should be compliant. Companies should be compliant because it is an important part of establishing a successful and sustainable business. You cannot be successful for a long time if you have a bad reputation and are constantly afraid of being caught.  The importance of compliance to the overall business should be communicated with individuals at all levels within a company to ensure that employees understand why they must react a certain way. 

Conclusion

When it comes to corruption, it is certainly true that prevention is the best medicine. The steps discussed above are necessary to get a solid start in the fight against corruption but are not sufficient in themselves to stop it. For corruption to be eradicated there needs to be a commitment by the private sector to doing business in a clean and honest manner. A zero-tolerance attitude towards corrupt entities by the public. And last, but certainly not least, clearly defined and thoroughly enforced laws on both a national and international level.

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