Fraud

The high cost of an ‘invisible’ risk

The Association of Certified Fraud Examiners (ACFE) Global Report on Fraud in the Workplace 2020 found that fraud is a universal problem affecting all organizations worldwide.

Occupational fraud is the most common kind of fraud and is extremely costly and difficult to detect, with fraud schemes lasting an average of 16 months before being discovered, due in part to employees’ reluctance to speak up.

There are three primary categories of occupational fraud: The vast majority of fraud schemes (86%) involve asset misappropriation, such as employee theft or misuse of the employer’s resources, at an average loss of $100,000; financial statement fraud schemes, in which the perpetrator intentionally falsifies or makes an omission in the organization’s financial statements, are the least common (10% of schemes) but costliest type of occupational fraud. Last but not least, the third category, corruption—including offenses such as bribery, conflicts of interest, and extortion—falls in the middle in terms of both frequency and financial damage. These schemes occur in 43% of cases with a median loss of $200,000.

Why don’t employees report fraud?

Part of the problem is cultural. Decades ago, when ethics or fraud hotlines were first deployed as the de facto solution in response to legislation such as 2002’s Sarbanes-Oxley (SOX),  they were deployed as a corporate compliance checkbox. Upper management had a solution that let them cover their backs but there was no requirement to encourage utilization.

Employees find hotlines less than user friendly. To start with, people must know of the existence of a hotline and how to access it. Hotlines are often outsourced to call center staff who are not employed by the company and may not understand the context of the incident. There are also significant blockers in following up on anonymous reports, disincentivizing reporters from the get-go.

For an employee, coming forward means being exposed and vulnerable to retaliatory harassment, demotion or even termination, despite the fact that retaliation for reporting fraud and corruption in the workplace is illegal. People, in general, don’t do ‘the right thing’ without encouragement and because employees are largely disincentivized to report misconduct, even when it’s personal, there’s an argument to say that because the victim of fraud is the company and not the individual, there’s even less incentive to raise the alarm.

Finally, employees are often unaware of the process for reporting or even inquiring about financial misbehavior. A 2017 study by the European Union found that less than half of all Europeans would not know where to report a case of corruption within their workplace, suggesting that internal reporting systems are not promoted, or are not done so effectively.

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