Increasing interest rates in South Africa and the rising incidence of fraud
On 21 November 2007, the oil price shot above $99 a barrel for the first time and has been flirting with the $100 a barrel landmark. Needless to say, such trends are putting further pressure on producer price inflation. Up to October 2007, there have been seven cumulative interest rate increases of 50 basis points each.
The effects of this are already being seen, for example, in December last year South Africa’s new vehicle sales slipped by 13,8 year on year according to data released. The question you may then be asking is “I can see the financial pressure that our businesses and employees are facing but what does all this have to do with fraud in my organisation?”
To answer that question, let’s start with what is commonly known as the Fraud Triangle that summarises the behaviour patterns surrounding a fraud. The triangle consists of three interlinked elements shown in bold in the following summary. An individual may feel under financial pressure due to his circumstances. Such pressure can arise from need or greed.
He / she then proceeds to rationalise that those circumstances justify that they commit a dishonest act. The last ingredient into that triangle is an opportunity where the individual believes they can override internal controls based on their position of trust or exploit a weakness to their personal benefit. So a fraudster is typically an average person in a financial crisis who sees a quick fix out of his situation through fraud.
In South Africa, we have recently seen the rapid growth of a middle class in recent years. Whilst this is positive in terms of economic and social fundamentals, within this class there will be individuals who are genuinely successful and those who are trying to keep up with the ‘Dhlaminis’ that will be under pressure to commit fraud.
A 1991 study by David Wiesband indicated that many fraud offenders had “material goods associated with successful people but may barely be holding their financial selves together as such respectability was built on the sands of debt”. Going back even further in history to show how the more things change the more they stay the same, Donald R. Cressey found in 1953 that most fraudsters “had lived beyond their means for some time before deciding to embezzle”.
Coming back to the present scenario in South Africa, this sort of situation is evident where individuals have high levels of credit and past and future interest rate increases are further tightening the screws. Certain economists suggest that the debt servicing costs of households have increased to over 9% of disposable income. The recently enacted National Credit Act avoids a deceiving reprieve; where previously such individuals would have recklessly accumulated more credit to pay off older debts their options are now limited by more prudent banking practise. At the same time, the societal push and shift in values towards affluence pushes individuals who are lagging behind in terms of accumulating assets such as vehicles to close the gap by, in some instances, crossing the legal line. From that analysis, one can see the pressure and rationalisation process that faces current and future fraudsters in South Africa. One can further see the potential relationship between macro-economic indicators such as interest rates / inflation and the levels of fraud.
Criminals commit crime using situations with which they are accustomed or where they can commit the crime with the least hassle. In South Africa, crime varies between violent and non violent crime. The unemployed may take the route of violent crime. Those who are employed may be in positions of influence or trust and they may be tempted to use that position for the purposes of illegal gain. A position of influence or trust is not necessarily a senior position – a bank teller or buyer is in a position where he / she is entrusted with funds or some purchasing decisions respectively. From that perspective, many employees do come across the opportunity to commit fraud.
Organisations are not defenseless however and they do have the means to combat fraud. Ernst & Young conducted a Global Fraud Survey on Fraud risk in emerging markets that covered eight emerging markets including South Africa. Respondents indicated that top tools which are imperative in preventing fraud include internal controls (74%), internal audit 65% and management reviews (61%). Of concern in South Africa is that 48% of respondents did not have a formal anti-fraud policy that is a necessary foundation to any anti-fraud initiative.
To further highlight our exposure, 86% of respondents felt that significant frauds are more likely to occur in emerging markets. This perception is real and actually hampers our growth as a nation and individual entities given that one in five organisations said they decided not to invest in emerging markets due to the results of their fraud risk assessments. These are statistics that we need to earnestly start chipping away at as individual entities. The business case for doing something about fraud is there given that companies on average can lose as much as 6% of their revenue to fraud.
