Analysis

Jul
2016

Fraud is alive and kicking.

It exists in every industry.  Alongside the emergence and threat of cyber-crime, it is extremely alarming.

So is fraud preventable?

Whilst anti-fraud controls and audit measures can help prevent the occurrence of fraud, the unfortunate truth is that companies are still vulnerable to the threat of internal fraud or perpetrated by employees within the company.

The Association of Certified Fraud Examiners (ACFE) reported in their 2016 Global Fraud Study that the median financial loss to each victim company was £100,000; whilst a disturbing 76% of employees or managers had committed the fraud.

So how do you spot a fraudster?

As fraud investigators, we follow the Fraud Triangle theory.  Those who commit fraud usually fall into three elements: motivation, opportunity and rationalisation.

Each of these elements plays a part in committing fraud.


Motivation

The motivation typically starts from financial pressure; such as paying for a nice lifestyle, educating children privately, covering financial mistakes or internal losses, to cover gambling habits or even paying for a divorce.

Fraud researcher Dr. Steve Albrecht believed that the most likely motivating fraud factors from the list of personal characteristics were:

·  Living beyond their means

·  An overwhelming desire for personal gain

·  High personal debt

·  A close association with customers and contractors

·  Feeling that pay was less than his/her responsibility

·  Strong challenge to beat the system

·  Excessive gambling habits

·  Undue financial family or peer pressure

·  Lack of recognition for performance


Opportunity

This is when an opportunity presents itself to the individual; often through inadequate controls or by taking advantage of the trust granted by their position. Yet believing they will not get caught.

Dr. Abrecht’s study also ranked a list of factors allowing the opportunities to commit fraud without being caught:

·  Placing too much trust in key employees

·  Lack of proper procedures for authorisation of transactions

·  No segregation of key duties and accounting functions

·  Lack of independent checks on performance

·  Lack of clear lines of authority and responsibility

·  Absence of frequent policy and procedure audits


Rationalisation

How do they justify their choice – to become a fraudster?

Rationalisation is often the key element when ethics enter the equation and moral judgement is tested. The individual will justify their behaviour in some manner to lessen their guilt.

The individual will believe it is not a criminal act, perhaps justifying their decision by paying the money back, or thinking that no-one will notice.

During our investigations, we often see perpetrators confess by believing that the company owes it to them for all the hard work they had put in over the years; thus rationalising their behaviour.


Where to look?

We are often asked where the most common areas of fraud occur. Here are our top five hot spots for employee fraud:

·  Personal and company expenses

·  Corrupt relationships with suppliers or vendors – when is a gift a bribe?

·  Shell companies and false invoices

·  Payroll for ghost employees

·  Window dressing – fictitious financial reporting


What happens when you suspect a fraud?

Once a suspicion has arisen, don’t panic but act quickly. Seize the initiative by developing a course of action.

Analyse the available evidence and circumstances surrounding the suspicion, retain accurate records, develop a fraud theory and set out your objectives in an investigation plan.

Whatever the investigation, each case must begin with the intention that it will end in litigation.


The following is our ten point guide for planning an investigation:


1. Analyse the existing evidence and identify who appears to be involved in the fraud?

2. Prepare and test your fraud theory. Look at the precise methods of the fraud – when, where, why, who and how?

3. Who benefitted from the fraud? Was it for personal gain or to hide internal losses?

4. Consider the possibility of a “worst case” scenario. Did it involve other people, competitors, customers or suppliers?

5. Refrain from alerting the suspects of your interest. Nor should you search through their work computers, laptops or emails without first forensically securing an original hard drive image as evidence.

6. What evidence is there to prove or disprove the suspicions?

7. Where is, or who has the relevant evidence and how can it be legally obtained?

8. Consider the preferred outcome in terms of disciplinary action, prosecution or litigation if the suspicions are true (try to resist disciplinary action until the facts have been established).

9. Identify and retain the necessary skilled resources to achieve the objectives and legally collect the best evidence from digital forensics, surveillance, interviews, profiling, communication analysis, and expenses records etc.

10. All evidence and records should be preserved and secured. Any movement of evidence must be catalogued showing the continuity of movement.


Cases of fraud and corporate dishonesty are diverse. Individuals will show different motivations, take deceitful opportunities and rationalise their actions. Uncover the truth using our investigation plan.

TenIntelligence provides due diligence, fraud investigation and brand protection services, with offices in the UK and in Dubai, UAE. Visit www.tenintel.com or call 020 3102 7720 for more information.




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