Opinion: Misconceptions of Fraud
Our efforts in deterrence, prevention and detection continue to be adversely affected by the many misconceptions held on fraud that afflict individuals, organizations and nations. The following are just some of the many fallacies that exist, and debunking these fallacies will go a far way in fighting this ubiquitous problem of fraud.
Fraud Is A Victimless Crime
Although the view that fraud is a victimless crime is rapidly losing ground, it regrettably still exists, especially by the perpetrators, who disingenuously seek to rationalize, justify or seek empathy for their nefarious deeds. Even amongst the general public, there are those who see fraud as “victimless” because it has little impact; many companies can afford it; victims may get back their loss; the loss most times is insured; there is no violence; and the list goes on.
The truth is, many frauds – even when the financial impact is minimal - can still have a devastating impact upon victims who sometimes experience financial hardship, broken relationships, psychological effects, mental and physical health problems, damage to reputation and so on.
In the case of large frauds, a single scam can destroy an organization; devastate families by wiping out their life savings; or cost investors billions of dollars. Terrorist attacks resulting in massive loss of life and property are often facilitated by fraudulent acts in their preparation and execution, and large instances of corruption can affect industries and economies. In the U.S., for example, insurance fraud alone (excluding health insurance) is more than US$40 billion a year, according to FBI estimates, and that cost is borne by insurers, insurance buyers and the general public.
Fraud Affects Larger Companies More Than Small Businesses
The massive resources controlled by large organizations are often viewed as the main target of fraudsters but the facts researched by the world’s leading anti-fraud organization, the Association of Certified Fraud Examiners (ACFE), and others paint a different picture. The ACFE for example, has determined that the frequency of different types of fraud schemes in small businesses (those with fewer than 100 employees) in general, exceed those perpetrated in larger organizations. In particular, the rates in smaller organizations surpass those in larger ones in the following activities:
However, it should be noted that in contrast, corruption (38% vs. 47%) and noncash schemes (16% vs. 19%) occurred more frequently in larger organizations. The reality is that, according to the ACFE, “small businesses face different types of fraud risks than larger organizations and they also experience unique challenges in combating occupational fraud. Whether it’s due to resource limitations, a lack of awareness or a tendency to place too much trust in their employees, small businesses implement anti-fraud controls at a much lower rate than their larger counterparts.”
Fraud Will Be Detected By Our Auditors
Historically, although auditors have been known to detect fraud during the course of their work, they cannot be relied upon to find fraud. The work of external auditors is designed to give “reasonable assurance” that the numbers shown on the financial statements are materially accurate, and the concept of “true and fair” characterizes their work. Although internal auditors have proven more effective, their best efforts to perform with due professional care, including promoting effective control at a reasonable cost, still do not guarantee that all significant fraud risks will be identified, unless specially trained. Due professional care does not imply infallibility or extraordinary performance since routine audits may not be designed to detect fraud. Because fraud involves the active concealment of the truth, it makes it difficult for auditors to discover.
The ACFE points out that despite the increasingly sophisticated fraud detection techniques available to organizations, tips were the most common way frauds were discovered in every one of their studies. In their latest report published in 2020, fraud was initially detected by sources of tips that led to fraud detection from employees and outside parties, including customers, vendors and competitors. Their findings revealed in order of occurrence that the sources were tips (43%), internal audit (15%), management review (12%), other (6%), by accident (5%), account reconciliation (4%), external audit (4%), document examination (3%), surveillance/monitoring (3%), notified by law enforcement (2%), IT controls (2%), and confession (1%).
Compliance with Regulations Will Protect Us From Fraud
It is true that compliance with most government regulations and corporate governance best practices (including accounting standards / regulations) will greatly enhance effectiveness in fraud prevention. Regrettably, these alone do not really provide robust protection against fraud. Compliance with these regulations must be supplemented by creating and implementing policies and procedures specifically designed to deter and detect fraud. This is best accomplished with the help of anti-fraud professionals who are experienced in the methods used by today’s shrewd corporate fraudsters. These professionals offer the best chance to develop fraud prevention programs that will actively prevent and detect fraud while still complying with the applicable regulations.
Frauds Are Perpetrated Mainly By Certain Types Of Persons
The sad reality is that fraudsters don’t fit a certain demographic; they come in many shapes and forms, all genders, all communities, all religions, all ages, all professions, all types of educational levels, employees, managers, contractors, suppliers, customers, clients, consultants, auditors - the list is endless. In fact, fraudsters look just like everyone else, fit no definitive profile, and an honest worker today may unfortunately be a future offender.
There are about 3.3 billion people in the global workforce, and nearly all of them have access to or control over some portion of their employers’ cash or assets. Those who decide to seek illegal gains, their workplace is, in many cases, the most logical and convenient target. While the vast majority of those 3.3 billion people will never abuse the trust placed in them by their employers, the small percentage who do can cause enormous damage.
Fraud Requires A High Degree Of Skill / High Level of Education
In these modern times, anyone can easily be a fraudster. Although there are highly skilled and well-educated fraudsters, there are no credentials, training, special skill, or experience needed to commit fraud in many cases. Browsers can easily be downloaded, and anyone can access the dark web and buy bulk stolen credit card numbers cheaply with little risk and limited technical knowledge. However, the ACFE has found that losses correlate with education because those with higher levels of education tend to hold higher positions of authority and might also have greater technical capabilities for committing fraud.
However, regardless of their level of skill, training, education or training, fraudsters have used their misguided ingenuity to execute their deeds, which usually involve methods to conceal their crimes such as creating fraudulent physical documents (40%), altering physical documents (36%); altering electronic documents or files (27%); creating fraudulent electronic documents or files (26%). Interestingly, 12% do not attempt to conceal their frauds.
Only Criminals Indulge In Fraud
Many persons do not consider themselves as criminals but indulge in various activities that can be technically categorized as fraud. For example, activities such as downloading songs illegally, buying counterfeit products and posting photos online without sharing ownership rights are conducted on a daily basis by ordinary persons not considering themselves as criminals. Not all fraudulent acts, therefore, are perpetrated by evil schemers indulging in nefarious deeds of alarming proportions. Many are carried out by ordinary persons daily who are generally not considered criminals in the classical sense.
The list of misconceptions continues, but space limitations prevent further elucidation. Clarifying these misconceptions can go a far way in deterring, preventing and detecting fraud.
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Collin Greenland is a forensic accountant. Email feedback to: cgreeny.collin@gmail.com
Editor’s Note:
The views of this writer are his own and may not necessarily reflect those of 18º North.
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