Category Fraud/Crime

Hotlines a hot ticket to fraud prevention

09 December 2014 Christo Snyman, Mazars

South African corporates are finding fraud hotlines and employee tip-offs the most successful tactics in identifying internal fraud. This is according to the Accredited Certified Fraud Examiners’ Report to the Nations on Occupational Fraud and Abuse Global Survey 2014, which includes feedback from 57 South African companies; by far the largest representation of any one country in the survey, which comprises a total of 1483 fraud cases around the world.

“Respondents cited fraud hotlines as key to identifying fraud with more than 40% of all cases being detected by an anonymous tip — more than twice the rate of any other detection method,” says Christo Snyman, Certified Fraud Examiner and Director of Mazars Forensics Services. “Employees were responsible for almost half of the tips included in the survey.” Respondents with fraud hotlines in place found losses to be reduced by 41% and detection to be 50% more time-efficient.

The study revealed that a typical organisation will lose 5% of annual revenue to fraud each year, with the median loss identified by recipients totalling almost R1.6 million. “In 22% of the cases, however, losses were at least R11 million,” Snyman adds.

Occupational fraud can be divided in to three primary categories; asset misappropriations, corruption and financial statement fraud. Of these, asset misappropriations are the most common, occurring in 85% of the cases in the study. While only 9% of cases involved financial statement fraud, these instances however proved to be the most costly to the company.

“Interestingly, the survey found there was a direct correlation between the level of authority and the cost of the fraud committed. The results show that the higher the perpetrators’ position in the hierarchy of the company, the greater the fraud losses tended to be,” says Snyman. While owners and/or executives accounted for only 19% of the studied cases, the median loss was at R5.5 million. “Employees, meanwhile, made up 42% of occupational fraud with a median loss of R825 000.” Managers were found to have committed 36% cases of fraud with a median loss of R1.43 million. On average it took 18 months for fraud to be detected, while perpetrators mostly committed fraud between one and five years of employment.

“Industries where fraud continues to be prevalent include banking and financial services, government, public administration and manufacturing,” says Snyman. “The highest fraud losses however, occur in the mining, real estate, oil and gas industries.”

With fraud and corruption becoming a scourge and placing the existence of businesses at risk, Snyman says that precautions need to be taken, and that the inclusion of a fraud hotline is a great starting point. “Other important practices include regular and surprise audits, proactive data monitoring, and the establishment of a dedicated fraud department or team to conduct formal fraud risk assessments,” he adds.

It is also imperative to be vigilant and identify red flags in the workplace. These could manifest through strange or altered behaviour including an individual living beyond his or her means, having financial difficulties, not wanting to share work and displaying an unusually close relationship with a vendor or customer. These traits were found to be the most common in the survey’s findings. These simple signs are often ignored or not viewed in a context of fraud and corruption leaving businesses open to risk. “Don’t criminalise staff by being overly suspicious, but remain vigilant,” Snyman concludes.

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