FINANCIAL LOSSES WITHIN ORGANISATIONS DUE TO INTERNAL FRAUD

Financial losses within organisations due to internal fraud

In what could be one of the biggest financial frauds of recent years, German payments provider Wirecard on Monday admitted that 1.9 billion euros that auditors say are missing from its accounts likely “do not exist”. The admission follows more than a year of reporting, especially by the Financial Times, on accounting irregularities in the company’s Asian division. In Wirecard’s case, 1.9 billion euros ($2.1 billion) supposedly sitting in trust accounts in the Philippines made up a quarter of the company’s balance sheet.

https://www.news24.com/fin24/companies/financial-services/billions-missing-as-payments-provider-wirecard-collapses-in-horrifying-fraud-scandal-20200622

Organisations lose 5% of revenue to fraud each year, according to the ACFE Report to the Nations 2020 Global Study on Occupational Fraud and Abuse. Occupational fraud which is also known as workplace fraud, internal fraud, or employee fraud, falls into three general categories, specifically, asset misappropriation, corruption, and financial statement fraud.

Asset misappropriation

The most common form of fraud is misappropriation of assets, in which an employee, executive or owner of a company uses his or her position to steal from an organisation. Examples include fraudulent disbursements for instance false expense claims, payroll schemes such as ghost employees, theft of cash on hand, personal purchases, misuse of inventory and other assets, etc.

Corruption

Corruption refers to the abuse of power by an owner, executive or employee in order to subvert the decision-making process for personal or company gain. Examples include conflict of interest, bid rigging, bribery, invoice kickbacks, illegal gratuities, economic extortion, etc.

Financial Statement Fraud

Financial statement fraud refers to a situation where an employee alters balance sheets, income statements or cash flow statements with the intention to deceive stakeholders or the public. Examples include net income overstatements or understatements through fictitious revenues, improper asset valuations, concealed assets, and liabilities, etc

Once organisations, as well as the employees, understand the forms which fraud can take, it is important to keep an eye out for the behavioural red flags that are associated with them. In most cases of occupational fraud, the perpetrator exhibits multiple red flags which include:

1. The employee is controlling, unwilling to share duties and/or takes leave infrequently and then only for very short periods.

2. The employee has an unusually close or personal relationship with a vendor or customer.

3. The employee is living beyond their means.

4. The employee has financial difficulties.

5. The employee subverts standard processes and acts as if the rules do not apply to them.

6. The employee is experiencing family problems such as a divorce.

Organisations should seek to instil greater transparency in financial practices and a wider culture of ethics. The most common means of detecting fraud include tip-offs and anonymous hotlines are the best way to facilitate tip-offs. Other controls include surprise audits, anti-fraud policies and employee support programs, which provide counselling to employees with personal problems that are affecting their work. A code of conduct, audits and proactive data analysis are all associated with faster detection.

Nortons offers Forensic Services and has the expertise inhouse to assist organisations in matters related to fraud, with a team of qualified investigators to perform forensic audits building a concrete chain of evidence that builds a case against the specific perpetrators of white-collar crimes.

Should you require additional information, please contact Anthony Norton on 082 452 7336 or by email on anthony@nortonsinc.com; or Tendai Kanongovere on 073 172 0800 or by email on tendai@nortonsinc.com

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