Fraud is an Inside Job

Welcome to the CRI Fraud Insider blog. In this space we will endeavor to keep you informed on a wide scope of fraud, ethics, risk and due diligence issues. I hope you visit this site regularly to find the latest information on fraud threats that may affect you, your company or your clients — and please feel free to leave comments and share your opinions and insight on these issues.

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In this first blog post, I'd like to provide a brief background about fraud and the types of insider schemes that can affect any organisation in today's international business climate. Statistics show that organisations worldwide lose an estimated 5 percent of their revenues to fraud. Additionally, research indicates that the vast majority of fraudulent activity originates from:

  • money laundering
  • intellectual property crimes
  • embezzlement
  • check and credit card fraud
  • online cyber fraud

Fraud can also include false accounting, cash theft, asset misappropriation, bribery, corruption, contract and procurement fraud, payroll fraud and numerous other misdeeds. 

Most fraud schemes are committed by individuals within the organisation. These employees abuse their position of trust and access to gain financially through illegal and/or unethical means against their employer. While most employees are honest in most situations, studies have shown that the right combination of financial need + rationalization + opportunity could lead to even a trusted employee to commit fraud. Worse, most frauds last an average of 18 months before they are detected — by which time they have done irreversible damage, and the pilfered funds may never be recovered.

Fraud is a worldwide problem and it is only getting worse. In the Middle East, for example, corporate fraud is underreported and growing, according to a new report by PricewaterhouseCoopers (PwC). To make matters worse, more respondents in this region than worldwide, 39 percent, responded that they expect their organisation to face an incident of bribery or corruption this year.

As reported in The National:

The most common corporate crimes in the Middle East, according to PwC, include instances of asset misappropriation, bribery and corruption, cybercrime and accounting fraud. Other less prevalent problems include intellectual property infringement, insider trading, money laundering and corporate espionage.

Combined, such issues have amounted to high losses for businesses.

In the Middle East, almost half of companies indicated that fraud cost them between US$100,000 (Dh367,323) and $5 million. Some 14 per cent reported suffering losses of more than $5m. Many organisations within the region — 25 percent — also said the risk of corruption over the past 12 months deterred them from entering into a new market. (Read the full article here

The news from PwC is troubling, but not unexpected. Nor are these issues limited to the Middle East. Recently, in a small town in the U.S., a trusted accountant was exposed for allegedly committing fraud over several years at a bakery. How much did he manage to steal? Hundreds or thousands of dollars? Incredibly, it is suspected that he managed to take upwards of $17 million (U.S.). Evidently, a business operation with few controls and too much trust placed in one employee fostered an environment in which this alleged fraudster was to go so far as authorise $10,000 checks to himself at a time. That’s not all: 

Since 2005, the suit alleges Sandy Jenkins used the bakery’s money to pay his bills with various credit card companies, including Citi, Bank of America, HSBC, Capital One, Sewell, Golden Circle Tree Trimming and Corsicana Preservation. The suit alleges he also took large amounts of money from the bakery’s petty cash account. His assets include two homes, one on Third Avenue in Corsicana, and one in Santa Fe; as well as five vehicles, half a dozen Rolex watches, jewelry, computers and art. (Read the full article here

Now, more than ever, it is important for every organisation to make fraud prevention and detection a priority. As I will share in future articles, the elements of a successful strategy include a code of conduct, reporting and monitoring system, and other means to uncover corrupt behavior.

The future of your business depends on safeguarding assets and investments from fraud.