Fraud in the company. How to detect and prevent it.
Fraud can be defined as that behavior whereby one person tries to take advantage of another by surprising them in their honesty. While society reacts to manifest acts of violence and terrorism, concentrating resources and dedication in the search for solutions, there are huge covert losses, possibly even more damaging in the long term caused by fraud actions, which are not paid due Attention.
In recent years, and due to the large increase in international violence, companies have tried to improve physical security measures. While the attention paid to manifest losses has increased, they have stopped addressing the most surreptitious risks, such as those derived from the action of the unfair or corrupt employee, dishonest connections or competition, the industrial spy or the organized criminal.
The very secrecy with which fraud occurs hides it from our attention: it acts as a malignant tumor that corrodes the company itself and, through this erosion, it is society as a whole that pays its consequences.
In such a circumstance and given the effect that frauds have on the running of the company, it is good to adopt measures conducive to detecting, preventing, reducing and eliminating them.
The rule that must always be kept in mind is the one that states that "the easiest way to earn money is to stop losing it."
Classification of the various types of fraud
From investigations carried out in the United States, Canada and the United Kingdom, the following types of fraud emerge and the percentage that each of them represents of the total:
No. Type of fraud Percentage of total
1. Bankruptcy fraud 0.19%
2. Bribery 7.18%
3. Computer fraud 0.23%
4. Consumer fraud 50.26%
5. Checks and credit cards 2.64%
6. Embezzlement 7.18%
7. Thefts 9.57%
8. Reception (of stolen items) 8.37%
9. Insurance fraud 4.79%
10. Fraud and falsification of securities 9.57% 100.00%
Fraud includes aspects as varied as:
- The use for personal or personal purposes of materials, supplies, energy, services, information and working time by staff, whether they are employees or managers. The sale of information, is that generated by research and product development, Market research or customer base. Counterfeiting of brands and / or products. Bribes. Theft of supplies, materials, products, formulas and documentation. Delivery by suppliers of material or components of lower quality, and in less quantity than the contracted., with the clear intention of benefiting to the detriment of the acquiring company.Use of the company's funds illegitimately, collection of interest and commissions not agreed, collection of services not agreed. Misrepresentation or manipulation of accounting data in order to show the achievement of goals;in many cases with the purpose of obtaining special prizes. Accounting manipulation to hide errors or management shortcomings (hide bad credit management or an over-stock, among others).
We can see from the exemplified cases that fraud can be carried out by internal or external agents or a combination of both, with the purpose of obtaining benefits, which result in an explicit or implicit loss, and a mediate or immediate loss for the company.
Fraud attitudes
There are no more controversial aspects of business activity than security, fraud prevention and detection. It seems clear that, in some areas, fraudulent behavior is openly tolerated or even institutionalized.
On the other hand, it is worth mentioning the contagious and corrosive nature of the lack of sanction for small frauds, which they multiply and increase in magnitude. It is enough that part of the staff obtain unauthorized benefits so that the rest want the same.
Multiply costs by all employees throughout the year and it becomes clear that fraud cannot be tolerated in any way.
Experience indicates that management does not exercise or establish an adequate control system because:
1. You fail to understand the risks that are inherent.
2. They deny the possibility of occurrence.
3. They refuse to make expenses or investments conducive to their prevention and control.
4. They do not fully trust the ability of controls.
5. They consider that security measures are not good for staff morale, as they contribute to their demotivation.
6. They consider that their internal or external auditors would detect fraud.
Decisive factors of fraud in the company
In the company, fraud is the result of the combination of two factors: opportunity and motivation. The opportunity may be generated by the access capacity, knowledge and time available to the person or persons involved in the fraud. Regarding motivation, need, justification and challenge are the key elements.
As a result of what we have observed, we can affirm that fraud is often foreseeable, both in its scope and in its management, due to the internal controls and climate created and generated by the company's management.
Fraud risk categories
Management style Good controls Unsatisfactory controls
Clear management style and staff practices TYPE 1
TYPE 2 improbable fraud
Possible fraud
Weak or poor direction and poor staff practices TYPE 3
TYPE 4 probable fraud
Inevitable fraud
From all this it follows that, if the motivation for dishonesty can be denied, the criminal possibilities are reduced; Most fraud will be nipped in the bud, if opportunities are limited and detection becomes the inevitable result of crime.
Unfortunately, the lack of understanding on the part of the management leads companies to be victims of Type 4. Just by achieving a change of leadership and a clear modification in the corporate culture, one would go from a condition of “inevitable fraud” to a situation of "Possible fraud". Hence the importance of corporate policy, the best of which is setting a "Zero Fraud" target.
Fraud detection
The first objective of detection is to help create a safe and solvent business environment by preventing loss from fraud. On the other hand, detection must lead to the investigation and recovery of lost funds.
In the systematic search to detect fraud, the following general rules must always be followed:
1. Never overlook the obvious.
2. Find the deviations, not the most complex solution.
3. Always focus on the simplest and weakest point of fraud.
4. If the accounts have been tampered with or records destroyed, the person whose guilt would have been more evident, if the manipulation or destruction had not occurred, will be considered as the first suspect.
5. If, after investigating all the facts, the culprit appears to be a certain person, it is more than likely that he really is.
6. Fraud prevention and detection is not a sporadic activity, but must be a routine part of business activity.
7. It is not essential to detect all frauds at once. The primary goal of fraud detection is to prevent fraud from occurring. In this way, if each case is detected and investigated, a deterrent effect is generated.
8. Sufficient resources should be devoted to the fraud detection task. Fraud detection is not a mere by-product of traditional auditing.
9. Fraud detection is an arduous task.
10. To detect and prevent fraud, it is necessary to specifically delegate said work to a person in charge.
Detection techniques
Among the top ten techniques aimed at detecting symptoms, manipulations, falsifications and concealments we have:
1. Audit of critical points. It consists of examining accounts and records in order to detect symptoms of manipulations and fraudulent conversions. The result of this is a list of fraudulent symptoms or possibly fraudulent aspects from which to initiate investigation activities.
2. Analysis of susceptibility to job fraud. This technique revolves around a simple question: "If there were a thief in this job, what could he do?" It is a simple analysis of fraud risks from the perspective of the potential thief ”(Negative Analysis).
3. Tables of vulnerability. Fraud only occurs when there is an opportunity for it. The more or less difficult the opportunity, the more likely it is to be seized. Vulnerability can be defined as the possibility that an act unfavorable to the victim will take place without being detected. For this, and by using a predetermined table, the risk levels of the various sectors, processes and activities of the organization are evaluated.
4. Surveillance. It can also be used as a preventive measure. It is truly surprising how criminals often begin to act in good faith when under surveillance.
5. Observation. It constitutes a technique for investigation and detection.
6. Informants and undercover investigations. This seeks to obtain in a hidden way, information and clues that can be used and demonstrated in the course of an open and frank investigation.
7. Business intelligence. From a fraud detection perspective, business intelligence seeks to ensure that the company's sales and supplies are not adversely affected by unfair competition practices.
8. On-site checks. An on-site check can be defined as a special check, supported by company management, on a specific circumstance or business operation.
9. Determination of possible criminals. The objective of the same is to coordinate and concentrate resources to discover known criminals or mere suspects and not cease in the effort until the suspicions have been confirmed or revealed unfounded.
10. Internal Control Matrix. Although it is above all a prevention system, properly implemented it allows the detection of anomalies thanks to the planned control of weighted risks for the various areas, sectors, processes and activities of the company.
How to defend yourself
If what makes a fraudulent conduct possible is the existence of an opportunity, an economic or psychological need, a moral justification and a low possibility of detection, the best form of defense is undoubtedly to attack the problem on all its fronts.
This implies reducing economic and psychological needs, as well as moral justifications, while increasing the chances of fraud detection. Countermeasures are as interdependent as causal factors.
The need for a balance between the flexibility of business operations, costs, and the defenses to be adopted must always be kept in mind when establishing a preventive system. If the controls are too strict, activities are interrupted and employees lose interest.
If, on the contrary, these controls are too lax, they will be easily overcome by criminals. The balance between prevention and restriction is difficult and almost impossible unless preventive controls are creatively and effectively designed, as well as supported by other measures.
The defenses must be stratified and compel the offender to follow an illegal line of conduct, for which there is no explanation that makes him innocent. This should be obvious to anyone who has in mind the commission of fraud against the company.
The fundamental rule to apply is: "First, think like a thief to determine opportunities and, in this way, devise controls that deter you."
Day-to-day security works only if the controls are enforced by themselves or if employees properly perceive:
- the risks of the areas in which they work, what are the security objectives of the company, what is expected of them, the sufficiency and consistency of the controls; and that breaches must be sanctioned.
The starting point is always to establish a clear organizational policy. Senior management sets the ethics and style for the company. Thus, if the managers themselves stop behaving honestly or tolerate unacceptable types of behavior, the employees will find, whatever their rank, greater reasons or possibilities to justify their infractions.
The security policy must be set by the managers and must be extended to the entire organization. This policy must establish a clear allocation of responsibilities.
The points or aspects to be duly considered include:
- The selection of personnel The protection of information The contracting of insurance for the risk of infidelity The planning of emergencies The establishment of physical security The implementation of an effective accounting control system The setting of clearly established responsibilities The rotation and separation of tasks Information and confirmation from third parties. Defense against commercial, personal and physical distortions. Establishment of an Asset Protection System.
Conclusions
Not taking due consideration of the risks of fraud constitutes, without a doubt, one of the greatest risks. It literally means exposing yourself to ambition and bad desires from both internal and external to the organization. The company that does not pay attention to the risks of illicit risks high losses. Like losses due to quality shortcomings and low levels of productivity, they are grouped among hidden costs, those not perceived.
An erroneous management of risk in criminal matters and consequently in preventive management will sooner or later bring great headaches to the company and especially to its managers.
That is why the best way to limit risks and at the same time increase the company's profitability is by establishing an effective and efficient fraud detection and prevention system, which is called an anti-fraud system.
As in continuous improvement, cost reduction, and quality improvement systems, the success of the anti-fraud system depends entirely on the commitment of managers.
Bibliography
Corporate Fraud - Michael Comer - McGraw Hill Book Company (UK) Limited - 1987
Fraud, the enemy that …………. Mercado Magazine - June 2006 - Pages: 80-87
The Twelve Zeros - Mauricio Lefcovich - www.gestiopolis.com - 2005.
