.Don't believe the myths, but stick to the facts — here are 5 most common misconceptions about fraud:
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1. Management is not responsible for fraud
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We don't want to disappoint you, but that's exactly management who is somehow involved in fraud or commits it. Look at the recent statistics of fraud detection: up to 12% of fraudulent operations are detected after management review. That's not a shocking number, but we can beat it with another fact: up to 35% of occupational fraud comes from management, and it's true both for non-profit organizations and private companies.
And who is more likely to override existing security measures at the workplace? Management it is. Managers are the most flexible in terms of occupational fraud. They stand in the middle between executives and ordinary employees and, as a consequence, know more about possible fraud schemes, even though they are not as damaging as a fraud from executives. Ordinary employees are more motivated by fraud, but managers have more knowledge and opportunities to commit it.
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2. Trust is better than controls
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Trust is important and can't be underestimated — however, that's not a trendy approach in compliance in recent years. There is a rise in anti-fraud training, policies, and implementation of whistleblowing hotlines of more than 10% in a decade — this indicates willingness to invest in effective tools for improved financial security. Trust is directly connected with the duration of fraud: with no controlling mechanisms, you can expect fraud to last for years. On average, fraud that is exposed after the confession of the perpetrator takes 17 months and only 7 months with surveillance. That's a lot of time and big money to lose — maybe it's better to have trust issues and check your employees?
Control doesn't feel like surveillance if the same rules apply to each employee in the company, with no exceptions. If there is a culture of transparency and compliance, employees are more interested in keeping it vivid. Trust in people's best but be prepared for the worst and the loss will be much lower, or you'll have a chance to investigate the matter faster.
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3. It’s a mentality thing
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It can be — in rare cases. However, in most cases of fraud, the perpetrator had the motivation to steal directly or assist in money laundering. The fraud triangle with its rationalization, opportunity, and pressure can't fully describe the full range of motivations to commit fraud, but it's never a simple desire to steal.
A person who genuinely believes that he or she is doing better for the company and commits fraud or a person who knows exactly what he or she is doing often stands in one line because of the final results of their actions. One can have the motivation to steal which can disappear with time, and the other one is clearly showing a social pattern of disregard for the truth. The first thing fraudsters usually do is abuse trust they get from the employer — you must be aware that it's hard to figure out who is who and having control in place is more beneficial.
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4. Fraud will always be
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Fraud tends to repeat itself: as long as people fight for better conditions for themselves, fraud is inevitable. Nevertheless, fraud can be controlled to a certain extent, and it's worth paying attention to new schemes of fraud and tools to hinder its development. True, fraud exists from the beginning of times, but so does snitching and whistleblowing, external control. Annually, organizations lose up to 5% of their revenue due to fraudulent operations — it can be 1% or zero with efficient and strict controls in place.
Fraudsters can't do their thing if the work environment is not vulnerable to fraud risks -beware of their motives and prepare a plan to fight back.
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5. Simple strategies don’t work
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Investing in the external audit is simple, and promoting business integrity values is simple. The idea of whistleblowing as a method of gathering crucial information on fraud is also not complex. All of these strategies contribute to the robust compliance system which takes years to build and requires efforts to maintain — yet, it consists of simple initiatives. Each of the available control instruments, such as surveillance, and external and internal audit, shorten the duration of fraud and reduce financial losses. The more methods you use, the more secure your business is — it makes sense, but don't be paranoid about it, since even the strictest security measures leave a loophole for fraud.
What is important in anti-fraud initiatives is not their complexity, but compliance with them — after the detection of misconduct and investigation, a reaction from the top should follow. Let's have a look at the case where the measures taken to detect and prevent fraud weren't “simple”: the NSW government has all the measures in place, including audit. However, after the whistleblower reported on money laundering (employees were severely underpaid for the projects), the investigation was continuing for 2 years. Eventually, the process stopped in the third year of investigation, and the $20 million loss couldn't be recovered. The ignorance of higher officials and lack of organizational culture led to fraud which can't be reversed, and even multiple security measures couldn't prevent it.
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All the myths we mentioned become true if the company ignores fraud red flags and doesn't invest in long-term initiatives for fraud prevention. You can't trust the system you didn't check — that's why we insist on security measures for every business.