Fighting Fraud

Sarah MacGregor
Director, Investigations and Forensic Services

“In a global economic downturn, need comes to the forefront and becomes intermingled with greed and opportunity.”

How private companies can reduce their exposure—in bad times, and good

The old expression “In bad times, people do bad things” seems to be repeated constantly nowadays. During difficult economic times, the incentive to commit fraud increases while the focus on fraud detection, prevention and investigations typically diminishes. And while the post-recession landscape suggests things are looking up, no private company is immune: previous cost-cutting and downsizing efforts are leading to weakened or non-existent controls and ultimately financial fraud from both within and outside the company.

According to Sarah MacGregor, Director in PwC’s Advisory, Investigations and Forensic Services group, “In a global economic downturn, need comes to the forefront and becomes intermingled with greed and opportunity, creating the perfect storm for fraudulent activity.”

During good times and bad, the most common types of fraud are expenditure leakage, revenue leakage, liability fraud, fraudulent financial reporting and misappropriation of assets (i.e. taking assets of the company for personal benefit).

That’s why it’s important that private companies increase their vigil over economic crime. Many fail to task fraud as a priority and develop robust anti-fraud regimes, especially during difficult economic times, leaving the company more vulnerable to financial and reputational risk. In fact, PwC’s 2009 Global Economic Survey shows that 56% of Canadian companies surveyed reported being victims of economic crime during 2009. Among them, 24% estimated their direct fraud-related losses to be greater than US$500,000.

“For many private companies, fraud equals big money lost,” says MacGregor. “But it goes beyond dollars lost. Fraud can also negatively impact employee morale, business relations, brand, and company reputation. Companies also risk losing their customer base―not to mention the time and expense of undergoing an investigation.”

Reducing your exposure

So what can private companies do to reduce their risk?

Sweeping reforms around fraud management are not the only way to effectively combat fraud. There are many simple and cost-effective strategies that companies can take in the short-term. MacGregor offers the following suggestions:

Ensure physical safeguarding and appropriate oversight of cash. Protection is key, especially when it comes to cash. Measures such as surprise cash counts can act as a deterrent for employees who may feel company cash is not closely monitored.

• Perform regular/timely reconciliations and independent reviews. Communicate to employees that an independent review is being done.
• Ensure employees are taking their full vacations each year. Many fraudsters have a history of not taking any or their full vacation entitlement.
• Mail cheques immediately after signing. Don’t leave them hanging around, creating the perfect opportunity for theft. 

Private companies should also think long-term to ensure their anti-fraud regimes are as robust as possible. “There are many options available to mitigate risk. Every company should explore and implement the ones best suited to their business”. MacGregor suggests considering the following:

• Develop fraud risk indicators as part of the fraud risk assessment. Consider your operations and controls from the perspective of a fraudster. For example, if you make employees provide receipts for any expenses greater than $25, those who frequently submit $23 charges should raise a red flag.
• Have good corporate governance and strong internal controls. Segregate important roles and responsibilities: the person who reviews bank reconciliations should not also be able to write cheques or post items in accounts receivable. An effective code of conduct, as well as appropriate oversight by an audit committee and Board, will benefit organizations looking to address fraud risk.
• Hold fraud awareness sessions. Educate employees about different types of fraudulent schemes, the risks involved, detection and how to design and evaluate controls. 
• Set up an anonymous hot line. Incident reporting mechanisms such as a hotline, email address, website or a P.O. Box give your employees and customers the opportunity to report fraud without fear of retaliation.
• Prepare an investigative protocol. In the event that there is an investigation into fraud allegations, make sure employees know what to do and whom to contact. Consider whether you need to bring in outside help, such as independent forensic accountants.
• Know your employees. Establishing standards for hiring and promotion will help to minimize the risk that untrustworthy or incompetent individuals are employed by your company. Items like criminal background checks, validation of academic credentials and reference checks can help to identify any potential anomalies with a prospective candidate.

“When anti-fraud measures are put in place, and communicated throughout the company, people will stop committing fraud if they think there's a crackdown,” says MacGregor. “But it isn’t just enough to develop a strategy, companies need to stay on top of it and monitor risk. You should be proactive to avoid the consequences of any scandal and be sure that you can act expeditiously and efficiently if the worst happens.”

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