Underestimating fraud risk

Responses to the survey show that financial and workplace fraud are perceived as being among the least important concerns for Quebec managers. Additionally, financial or workplace fraud ranked low among the concerns of Quebec business owners or senior executives in 2024 — second to last to be precise.

Based on the survey results, Quebec business owners are more concerned with staff management issues such as recruitment, labour shortages, and training, as well as the current economic situation. These issues are deeply interlinked and have a direct impact on business sustainability and growth. On the other hand, the risk of fraud is a latent threat. This means it does not typically appear openly in the daily operations of a company. 

Fraud risk perceptions directly influence the level of concern about financial fraud. For example, those who perceive fraud as a high risk are more likely to express high levels of concern about fraud. However, fraud risk perceptions still remain somewhat low in 2024 — with 78 percent of survey respondents perceiving the risk of financial fraud as very low to moderate. This is similar to the 80 percent of respondents who perceived the risk of financial fraud as very low to moderate in 2021. Unsurprisingly, businesses that had been a victim of financial fraud showed greater concern.

Fewer respondents perceive fraud as a low risk while more identify it as a moderate risk in 2024. However, financial fraud still ranks as a relatively low concern for Quebec businesses executives, with only 18 percent placing it among their top three concerns and a mere four percent identifying fraud as their top concern.

Fraud risk perceptions also varied significantly between positions within an organization. Business owners were more likely to perceive fraud as a high risk. However, about three in four Quebec business owners still perceive this risk as low to moderate.

Concerns about fraud risk dropped when speaking to non-owner executives. Twenty-three percent of those in a controller or director of finance position perceived fraud as a high risk to their organization. Only 19 percent of individuals in a vice president or senior position identified fraud as a high risk.

“Fraud poses a significant risk to business owners, as fraud can directly impact their personal investments, equity, and business continuity. Therefore, it’s understandable that they perceive it as a higher risk,” says Corey Bloom, leader of MNP’s Forensics and Litigation Support Services team in Eastern Canada. “Concerns about fraud fall significantly among the ranks of non-owner executives, which is concerning as they may prioritize operational or departmental goals over systemic risks like financial fraud. However, everyone in an organization has the responsibility to protect it against fraud.”

Consistent with previous results, the answers from this survey showed that younger respondents continue to view fraud as a higher risk compared to older individuals within an organization. Longer tenure appears to encourage complacency rather than vigilance against fraud.

Mismatch between concerns and reality

Overall, survey respondents still feel that their businesses face a moderate level of exposure to all forms of financial fraud, with no specific type standing out as riskier than others.

However, the results from the 2024 survey exposed a gap between the types of fraud respondents are most concerned about in comparison to those businesses are most likely to experience. This disconnect was already noted in 2021 and may indicate that businesses are focusing on less probable threats rather than addressing the actual vulnerabilities that are more likely to lead to fraud incidents. For example:

• Theft of confidential information and intellectual property was cited as the highest perceived risk again, with an average weighted score of five out of 10. However, this type of fraud was cited as the fifth most prevalent type of fraud impacting Quebec businesses in reality.
• Fraud by a supplier or customer and fraudulent disbursements such as expense reports or falsification of payments were also perceived as high risk, with a weighted score of 4.7 and 4.4, respectively. These types of fraud were cited as the fourth and sixth most prevalent types of fraud really impacting Quebec businesses.

According to the Association of Certified Fraud Examiners (ACFE’s) 2024 Report to the Nations, asset misappropriation schemes are the most common type of fraud. However, survey respondents perceived these types of fraud as a lower risk. For example, embezzlement was one of the lowest perceived risks with a weighted score of 4.1, despite being the second most prevalent fraud scheme impacting Quebec businesses.

The results from the survey show that payroll fraud was rated as a lower perceived risk amongst different types of financial fraud. However, payroll frauds are some of the most prevalent forms of fraud in reality — ranking as the third most common fraud scheme impacting defrauded companies in our survey. Business owners who do not take the steps to reduce the risks of these types of fraud are leaving their organization vulnerable.

“We are seeing a mismatch between the types of fraud that business owners are most concerned about and the types of fraud that they are most likely to experience,” says Simon Gaudreau, Senior Manager of MNP’s Forensics and Litigation Support Services team. “This indicates they may be looking in the wrong direction when implementing anti-fraud measures in their business, which creates gaps and blind spots for fraud to occur. Looking in the wrong direction not only allows for opportunities for fraud to occur. It can also be costly and time consuming for an organization to implement insufficient or unnecessary measures. It is essential to instead ensure that the appropriate anti-fraud measures are in place to address the areas where the company is most vulnerable.”

Misconceptions on peer-evaluated risk

Most businesses believe they are at equal or lower risk of financial fraud than their competition. Three times as many respondents believe that their company is less exposed to financial fraud than their competitors, compared to those who believe that their competitors are at less risk than they are.

Similarly, most respondents believe that other lines of business face a comparable or greater risk of financial fraud than their own. Three times as many respondents believe that their line of business is less exposed to financial fraud than other business lines in comparison to those who believe that the others are at less risk than they are.

“It’s tempting to believe that fraud occurs elsewhere — and not within your own business,” says Bloom. “However, the reality is that fraud can happen to any company. The ACFE estimates that organizations lose approximately five percent of their revenue to fraud each year, which makes it crucial to take a look inside your own organization and remain vigilant. Different businesses face different fraud risks based on their specific operations.”

However, financial fraud risk does not seem to be perceived differently by line of business. Certain industries, such as wholesale, construction, healthcare, and retail are more inclined to perceive their risk of financial fraud as high.

Overlooking the impact of the economic environment

Economic factors such as high inflation and rising interest rates appear to influence the perceived risk of financial fraud. Forty percent of survey respondents believe their business is facing more risks than before. However, the remaining 60 percent believe the current economic climate did not change the risk of fraud, or even decreased the risk of fraud.

"High inflation and rising interest rates create financial pressures that can increase the risk of fraud — both internally and externally," explains Gaudreau. "Employees facing personal financial strain may be more tempted to commit fraud, while businesses struggling to maintain margins might cut corners on internal controls. This creates opportunities for fraudulent activities to go undetected. Additionally, the pressure to meet financial targets in challenging economic conditions can drive some to manipulate financial statements. Financial statement fraud is the costliest type of financial fraud for organizations according to the ACFE."

Sixty-eight percent of survey respondents perceive financial need as the most common motivation for committing financial fraud. This is consistent with the ACFE’s findings, which indicate that living beyond means and financial difficulties are the top two behavioral red flags exhibited by fraudsters.

Owners are less likely than others within businesses to think financial need is the main motivation of employees committing fraud. Other perceived motivations for committing financial fraud include a lack of loyalty to the business or a perceived opportunity due to insufficient controls.

“Each of these factors can trigger certain employees into committing fraud,” says Bloom. “This makes it critical to implement strong anti-fraud internal controls within a business. Research from the ACFE shows that more than half of occupational frauds occur due to a lack of internal controls or an override of existing controls. Assessing those controls within your business and implementing strong measures can help significantly decrease the likelihood of fraud.”

Incidents of fraud and fraud misconceptions

About 1 business out of 3 will be impacted by at least one financial fraud during its existence. Comparing how businesses self-assess their fraud risk and their previous experiences with fraud in the business paints an interesting picture. Organizations that have experienced fraud in the past are most likely to perceive their fraud risk as high and are speaking from hard-earned experience. Those who have not detected fraud may be more unaware than invulnerable.

The results from the 2024 survey show that businesses have been impacted by financial fraud at close to the same rate as in 2021. Twenty percent of 2024 survey respondents reported being impacted by financial fraud in the past. However, 13 percent stated that they do not know if their organization has been impacted by financial fraud — but suspect it occurred.

Findings from MNP’s previous surveys show that one in five companies has been a confirmed victim of financial fraud in the past. MNP’s Forensics and Litigation Support Services team unanimously believes that the actual proportion of businesses that have experienced financial fraud is potentially far higher than data suggests. This is due to the likelihood of many frauds being either undetected or unreported. If the proportion of companies that suspect fraud has occurred are added to the known occurrences, it brings the number close to one in three companies that would have been victims of fraud.

“Fraud can be very difficult to detect if you don’t know where to look or what controls to have in place,” says Bloom. “Therefore, it is likely that many incidents slip under the radar — which leaves the door open to ongoing fraud that makes a greater impact on a business.”

Survey respondents reported that their business experienced financial fraud three times on average. Furthermore, a worrisome 15 percent of impacted respondents were victims five times or more.

Fifty-two percent of those who had experienced fraud in the past reported that the incident occurred within the last three years. One in four impacted businesses reported that they have been a victim within the last year.

Fraud significantly impacts both the finances and management of a business. Two-thirds of businesses that experienced financial fraud reported that it resulted in a moderate to very high impact to their financial and managerial stability.

Fraud was perceived to have a less significant impact on a business' reputation compared to its finances and management. Among businesses that experienced financial fraud, 40 percent reported a moderate to very high impact to their reputation.

This suggests that the immediate financial and operational effects are perceived as more critical than reputational damage. The prevalence of fraud in today’s society may contribute to this perception, as businesses focus on managing the direct financial consequences of fraud before their public image.