Internal fraud: A silent epidemic
Internal fraud is a pervasive issue affecting companies across various sectors and sizes. When employees deliberately prioritize personal gains at the expense of their employer, it falls into the realm of internal fraud.
This problem is so prevalent it leads to an estimated 5% loss of revenue for businesses every year - 5% may sound insignificant but that's a loss of $50 billion every year in the US. This concerning statistic highlights the seriousness of the problem and calls for the implementation of measures to identify and prevent employee fraud.
The amount lost on every dollar to internal fraud
The amount of revenue lost to internal fraud every year
The amount of employees who admit to stealing at least once from an employer
So, let's delve into the intriguing world of workplace deception and its hidden consequences.
Understanding Internal Fraud
At its core, internal fraud - also known as occupational fraud - is any illegal activity carried out by an organization's own employees. Internal fraud usually involves deceptive acts with the goal of benefiting the perpetrators personally, while causing financial losses for the company. It can take various forms, such as theft of company assets, misuse of resources, embezzlement, or even manipulating financial statements.
There are generally speaking, three types of internal fraud:
- Asset misappropriation: When someone takes or misuses an organization's assets, like cash, supplies, or information. It can happen in different ways, from grabbing office supplies to fancy embezzlement schemes. Often, it involves an employee taking advantage of their trusted position.
- Financial statement fraud: When people purposely misrepresent or change financial accounts. The aim is to make a business look financially stronger than it actually is, often to attract investors, pump up stock prices, meet goals, or get loans. This can be done by faking revenue, hiding expenses, downplaying debts, exaggerating assets, or using tricky transactions to confuse people. It's different from other types of occupational fraud, like stealing assets or being corrupt, because it usually involves senior-level management.
- Corruption: When individuals within an organization are dishonest or unethical, such as accepting bribes, showing favoritism, or acting in a way that benefits themselves but harms the organization. Corruption can happen anywhere in a company, but it's usually connected to people in power. They might bend the rules, fake records, or misuse company resources for personal gain and the consequences are significant - financial losses, reputational damage, legal implications, and a loss of trust from stakeholders.
According to the 2022 Association of Certified Fraud Examiners (ACFE) report, asset misappropriation is the most common type of internal fraud, accounting for 86% of cases with the median loss being $100,000 USD. Financial statement fraud, while less common at 9% of cases, results in the highest financial losses at a median of nearly $600,000 USD. Meanwhile, corruption falls in between, in terms of frequency and losses.
The Importance of Internal Controls
Let us share an intriguing fact from the ACFE report: the main issue in almost half of the cases studied was the noticeable absence of proper internal controls. The remaining cases were equally interesting as they showcased managers overriding existing controls.
To effectively prevent internal fraud, it's crucial to have strong internal controls in place. These controls include regular monitoring, strong oversight, and separating duties to protect all aspects of the organization. By establishing a transparent and accountable framework, businesses can address vulnerabilities and improve their risk management strategy, creating a more secure and trustworthy environment.
Detecting Fraud through Audits: Leveraging Technology for Prevention
Regular audits are a critical weapon in the battle against employee fraud. They have the power to uncover inconsistencies and suspicious activities that may otherwise go unnoticed. With comprehensive reports built-in to Protege GX for events, mustering, attendance, and users, which can be scheduled and downloaded, tracking any irregular activities becomes effortless.
Open technology platforms, such as Protege, play a crucial role in combating internal fraud by integrating robust access control, cameras, and wireless sensors. These platforms act as effective deterrents, leveraging features like anti-passback to track movements accurately, automatic re-arm for secure areas, and dual authentication to require two users to badge at a door for it to unlock. By implementing these proactive measures, organizations can mitigate risks and ensure the security of their operations.
Automatically arm an area once it has been disarmed for a period. Limit the duration that a user can remain in an area.
Dual code control
Requires two authorized users to enter PINs to disarm a restricted area.
Requires two authorized users to supply credentials to gain access to a door.
In conclusion, the threat of internal fraud is real and pressing. As such, it is crucial for companies to prioritize fraud prevention measures to safeguard their businesses and assets. Implementing robust internal controls, conducting regular audits, and leveraging technology can significantly lower the risk of employee fraud. Let's all strive for a fraud-free workplace, ensuring that the hard-earned revenue is used to further the growth and success of our businesses.