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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.