Fraud in the changing world: Inoculating your business against risk

March in Canada is the time of year when many of us start to think about emerging from the weather-imposed lockdown of winter. For those of us in the business of fighting financial crime, March is also Fraud Prevention Month. And this March we are all thinking about breaking out from not just the winter ice but the pandemic-imposed freezing of our economy and our society. 

Many changes to our businesses have been made to deal with the new economic and social reality, changes that were often troublesome. Changes that were strange and unwelcome - but also changes that created exciting opportunities. And not just for honest business people.

Fraud prevention professionals understand that while change is positive, it can also pose significant risks that need to be managed for a successful economic recovery.

Fraud awareness encourages a culture of ethics

Whatever plans you have for your business this year, be mindful that the risk of fraud is ever present. According to the Association of Certified Fraud Examiners (ACFE) 2020 Report to the Nations, fraud continues to represent, on average, five percent of a business’s revenue. The association also reports a worrying trend that corruption (such as bribery, conflicts of interest and extortion) has become the most common scheme in every global region. While corrupt activity may not, on each occurrence, cost as much as other fraud (e.g. financial statement fraud), its frequency and total impact is significant. 

However, it has been proven acknowledgement of the risk of fraud from senior leadership sets the character of an organization, encouraging actions big and small to mitigate those risks. Given what is happening in the world, now perhaps is a good time to revisit and reinforce this tone.

The past year has put a strain on your teams, and a rebuild of your corporate culture should include an emphasis on ethical behaviour. Recruiting and ongoing work performance management should actively encourage ethical behaviour as a path to long term prosperity. This is particularly important in the face of pressure to show short-term financial gains in the early stages of recovery. That pressure, absent a strong emphasis on ethics, increases your organization’s risk of fraud.

Update your risk assessment

The past year has impacted virtually every Canadian business. Staffing changes, remote working, geographic footprint, products and services, use of technology, new supply chain partners and how money is moved around – any or all of these pose new fraud risks that must be assessed and managed. 

While well-managed risk is a strategic advantage, unmanaged risk is a disaster waiting to happen. Bring together a cross-functional team, including fraud advisors, to consider how fraudsters might exploit changes to your business, and implement measures to reduce risk to an acceptable level. 

Each business will have different areas to assess but all should consider these key issues:

• how money is now moving to and from your business
• what authorization is needed to initiate and complete these transactions
• how someone could intercept, break into or interrupt transactions
• how products are now being delivered to / from your business,
• what people are involved in the supply chain and what records you must have to authenticate their movement

And finally, reconsider how you are making contracts and documenting your authorization or endorsement of them.

Internal controls and whistleblowing hotlines

Newly identified fraud risks can be effectively managed with appropriate internal controls.  Implement preventative controls such as fraud awareness training for employees, thorough due diligence of key and new business partners (it can be easier to hide or disguise truth in a virtual environment), and enhancing your cyber security posture – and detective control.

This includes running a fraud-focused audit of key areas, leveraging data for continuous monitoring of transactions, and implementing a whistleblower hotline to receive confidential reports of concern. It is critically important to follow up on anomalies from expectation, such as inventory discrepancies, unreconciled bank, receivable or payable balances, unusual adjusting accounting entries and customer complaints.

The impact of confidential tips in uncovering fraud can’t be understated. Tips are the single most common way in which fraud is detected in a business. The 2020 ACFE Report to the Nations states that 43 percent of fraud schemes were detected by tips, half of which came from employees. A reporting line process gives your best people a way to contribute to a culture of ethics, and results in fraud being found more often and more quickly, cutting the financial losses dramatically.  

Hire professionals

Reported or suspected fraud incidents must be investigated, thoroughly and professionally. A proper investigation supports all aspects of your fraud risk management framework: it communicates the importance the fight against fraud has in your business, identifies gaps in your risk assessment, tests the effectiveness of current internal controls, and informs necessary corrective action for the future. 

Improper investigations pose legal and reputational risks, minimize the opportunity for recovery of losses, and have a negative impact on employee morale.

Don’t let your guard down

Fraud risk management is not a once-and-done exercise. Ongoing monitoring at the highest level of your organization reinforces the importance of this initiative and provides opportunity for continuous improvement. It holds the organization accountable for both effort and results. 

As your business grows and changes your risk assessment needs to be refreshed. Most importantly, giving life to your fraud risk management gives life to a culture of ethics that will guide and drive your success for years to come.

For more information, contact Lisa Majeau Gordon, National Leader, Forensics and Litigation Support, at 780.453.5375 or [email protected]