Fraud Health Check-up

by Mario Fazekas, Ernst & Young Forensic Services

Deception lies at the heart of fraud and in most cases the fraudster ends up being a trusted, long-serving employee whose position allows him/her to steal month after month and conceal the fraud losses for years. Your organisation’s challenge is to find the soft spots or ‘Achilles Heels’ that may be allowing current fraud to occur, or that may allow future frauds to take place.

We have found that the effectiveness of traditional management techniques has been mitigated by:
• The growing dependence on computers;
• The increasing speed and complexity of transaction processing;
• The trend towards downsizing and business reengineering which have stripped away the layers of middle management conventionally responsible for prevention and detection controls;
• The growth in organised crime syndicate activity.

The result is that fraud is less detectable and – as a result of an under-resourced criminal justice system – more attractive proposition to the disgruntled, the greedy, the desperate or the opportunistic than ever before. The most efficient and cost-effective way to combat fraud is to engage in proactive activities designed to prevent fraud. Although the importance of reactive strategies cannot be disputed, it is far easier to prevent it in the first place.

Why should organisations have a fraud prevention Check-Up?

There are 6 very good reasons…

1. It could save your organisation. Fraud can be a catastrophic risk. If you don’t proactively identify and manage your fraud risks, they could put you out of business almost overnight. Even if you survive a major fraud, it can damage your reputation so badly that you can no longer succeed independently.
2. It could pinpoint opportunities to save you a lot of money. Fraud is an expensive drain on an organisation’s financial resources. In today’s globally competitive environment, no one can afford to throw away the estimated 6% of revenues that represents the largely hidden cost of fraud. If an organisation isn’t identifying and tackling its fraud risks, it is disadvantaged against competitors who lower their costs by doing so.
3. Fraud is now a common risk that shouldn’t be ignored. The incidence of fraud is now so common that its occurrence is no longer remarkable, only its scale. Any organisation that fails to protect itself appropriately from fraud should expect to become a victim of fraud, or rather, should expect to discover that it is a victim of fraud.
4. It’s the least expensive way to find out the organisation’s vulnerability to fraud. Most organisations score very poorly in initial fraud prevention checkups because they don’t have appropriate anti-fraud controls in place. By finding this out early, they have a chance to fix the problem before becoming a victim of a major fraud. It’s like finding out you have seriously high blood pressure. It may be bad news, but not finding out can be a lot worse. (Senior management is not expected to be experts on controls, but they are held responsible if effective systems are not in place. Many of the recent high-profile companies that collapsed due to alleged fraud were very good companies. What most of these companies had in common was the fact that at a time when their attention was distracted from the importance of controls, their luck ran out.)
5. It’s a great opportunity for an organisation to establish a relationship with a Certified Fraud Examiner on whom they can call when fraud questions arise. Since the risk of fraud can be managed but is rarely eliminated, it’s likely that the organization will experience fraud in future and will need a CFE’s assistance.
6. A strong fraud prevention program could help increase the confidence investors, regulators, audit committee members and the general public have in the integrity & quality of the organization’s financial reports. It could also help to attract and retain capital.

Effective fraud prevention should be a New Year’s resolution for all businesses - so when last did your organisation have a fraud health check up?

Mario Fazekas is a Relationship Manager with Ernst & Young's Forensic Services. For more information on Ernst & Young's EyMMUNE fraud prevention program, contact Mario on 083 6110161 or email fazekma@ey.co.za.

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