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Fraud is one of the societal ills that affect private companies, public institutions, and individuals alike. The loss suffered from fraud has the potential to cripple operations of businesses or put organizations in financial jeopardy.
A report on occupation fraud and abuse compiled by the Association of Certified Fraud Examiners (ACFE) paints a clear picture of fraud in different industries. Fraud in the private sector accounts for 40% of all fraud; while the median loss of reported fraud amounted to $238,000. The banking and financial sector is the hardest hit, comprising 17% of the total fraud cases recorded. Instances of identity theft and credit card fraud have also risen because of the increase in online transactions and uptake of technology.
Below are some of the reasons why fraud has become more common in different industries:
1. Weaknesses In Internal Controls
Depending on the industry, the type of internal control varies. Governments bodies, for instance, can use a combination of internal auditors and independent firms to check fraud. On the other hand, manufacturing companies can employ CCTV cameras, install GPS trackers on delivery tracks, and employ sophisticated point-of-sale solutions as part of the controls.
The above measures in various industries suffer from adverse factors like human intervention, system failures, programming errors—all of which can provide loopholes for fraud. Employees can easily collaborate with external actors to exploit a weakness or a temporary lapse in the control systems.
Companies and organizations should have mechanisms for employees or whistleblowers to report fraud. These initiatives need to complement internal control efforts. For instance, according to a local firm, Price Armstrong LLC, the False Claims Act in the United States provides a safe channel for whistleblowers to report fraud. Consequently, the government has recovered billions of funds acquired through underhanded deals.
2. Partnerships With Third-Party Contractors And Service Providers
The rise of technology has paved the way for subcontracting and business process outsourcing. Businesses are no longer 100% in charge of production, service quality, and management of the company’s affairs.
Below are instances where third party actors promote fraud:
- Billing gateways and platforms: Private companies, government agencies, and other industries like manufacturing lease billing platforms for better management. Fraudsters can liaise with employees of billing companies or the target company to execute a loss of funds.
- Management systems: Business relies on IT companies to develop software geared towards improving the operations of companies. The software can create a gateway to hackers to access sensitive information like customer information, intellectual property, or business secrets.
- Some organizations are also easily exploited because of their unsecured control and technical knowledge of management systems.
Third-party agreements and business to business gateways provide a big threat to the organization. If organizations fail to ensure secure access to, they could be fall prey to constant fraud incidents.
3. Greed Among Various Stakeholders
Fraud occurs when an opportunity arises for someone with intentions to defraud or steal. Greed among employees, the management and shareholders, can be the catalyst of fraud. The additional pressure to deliver results, drive profitability, or to gain a lavish lifestyle can breed perfect conditions for fraud.
Below are areas where greed can manifest itself into fraud.
- Performance-Based Greed: The need for higher profits or superior rank in the industry is used to create pressure on existing resources. The management sets bigger sales and revenue targets to the sales department and huge end of year bonus.
As a result, sales departments sometimes find the motivation to use fraudulent sales figures to gain the bonus payment.
- Acquiring Defective Systems: The management team of any organization handles the sensitive role of acquiring systems and other key assets. Greed or low moral values can inspire them to acquire defective systems through collaborations with vendors to receive kickbacks.
A poor or a defective information system cannot detect fraud; it may fail to give timely, early warnings, or sufficient details.
4. Employee-Related Fraud
A survey conducted by Price Water House Coopers (PWC) indicated that 52 percent of economic crimes were related to internal actors. This percentage included staff members and management. Big organizations are even more susceptible to employee fraud due to the size of the workforce.
Therefore, organizations should ensure the human resource department is capable of proper vetting during recruitment. Organizations should avoid mistakes of recruiting people involved in fraud instances in the past, or who have questionable value systems.
Poor training, lack of sensitization, and lax company procedures are also to blame for employee theft and fraud. Sensitization on the effects of cash embezzlement, inflation of claims, or stock theft should be part of the measures that can be implemented.
Fraud cases have caused losses in the banking industry, government agencies, non-government bodies, and other industries, including manufacturing. Fraudsters exploit systemic failures or people tasked with overseeing the operations.
Fraud has become more common because of the rise in online transactions, collaborations with third party actors, and poor employee management.