Where within an organization is fraud more likely to occur?
Fraud will most likely occur in organizations where highly people-oriented processes are used to control the flow of funds, especially cash, and also monitor the flow of funds. While people are the key element of any organization, it’s essential that organizations not overlook the ‘humanness’ of employees and provide them with unfair temptation.
While we may not view it as such, almost all of us break the law multiple times during the day — especially if we’re commuting into Chicago from the suburbs. Speeding is illegal. However, many of us commit this act frequently because 1) we’re often pressed for time (motive); 2) most cars are powerful enough to break the speed limit (opportunity); and 3) we feel it’s justified and the perceived penalty is low (rationalization). If, however, our cars were electronically programmed not to exceed the speed limit, the ability to break the law would not exist.
In much the same manner, it’s essential that organizations remove the opportunity for fraud from people-oriented processes to ensure that frauds cannot occur.
Are frauds typically committed at higher levels of the organization, or at the employee level?
Interestingly, though the frequency of fraud decreases as one progresses up the organizational ranks, the median loss of frauds grows significantly the higher the fraud occurs. For instance, roughly one-third of all frauds are committed by nonmanagerial employees, but the median loss for such frauds is less than $100,000. On the other hand, frauds committed by executives and owners are much less frequent, but the median loss for such frauds at that level is nearly $1 million.
Many firms concentrate on fraud controls at the employee level, but it’s also important to concentrate on the executive level. For example, we recently were engaged on a case in which a rental company had stringent controls on the rent collection process, making it very difficult for employees to commit fraud. What the company didn’t realize, however, was that the CFO was taking money out the back door because he had the power to override fraud-related controls and did so at his leisure.
How can organizations safeguard their assets against fraud?
The best way to guard against fraud is by assessing areas of vulnerability at all hierarchical levels of the organization through a comprehensive operational assessment. Such an assessment will examine the key processes in place throughout the organization, potential risks within each process and mitigating factors designed to minimize these risks.
By examining each of these elements, an operational assessment can help senior managers not only understand which areas are susceptible to fraud but can facilitate a discussion centered on re-engineering vulnerable processes to minimize the opportunity for fraud, as well as on the development of new mitigating factors to minimize risk.
ADAM WADECKI is manager of operations for Cendrowski Corporate Advisors LLC. Reach him at [email protected] or (866) 717-1607, or visit the company’s website at www.cca-advisors.com.