The $3.7 Trillion Question: How to Stop Fraud?
The numbers on the impact of fraud worldwide are astonishing. According to the Association of Certified Fraud Examiners (ACFE), fraud cost the world economy around $3.7 trillion last year.
While financial reporting fraud remains relatively rare, its annual impact is still significant. ACFE says financial reporting fraud accounted for 9 percent, or $333 billion, of its 2013 total.
In the face of these large numbers, what's our plan of attack? How can we better deter, detect, and mitigate fraud? In my judgment, the process begins with a few key steps. First, we build our understanding of fraud. Then, we collaborate and communicate effectively to fight it.
The Starting Point: Understanding
In the realm of fraud, understanding is a vital first step. It's also a potentially daunting one, given the complexity and size of the issue. Still, we are fortunate that research in recent years has yielded valuable information about the conditions that make an organization more susceptible to fraud, as well as techniques and tools that support both deterrence and detection. This knowledge is of particular value to all participants in the financial reporting process, including management, boards of directors, audit committees, and internal and external auditors.
Here are a few standout resources:
- ACFE's Report to the Nations On Occupational Fraud and Abuse
- EY's Global Fraud Survey
- Kroll's Fraud Report
- KPMG: Who Is the Typical Fraudster?
Next Step: Collaborating
Anyone who studies the problem of fraud quickly realizes that fighting it is an all-hands-on-deck effort. That's why my organization, the Center for Audit Quality, joined Financial Executives International, The Institute of Internal Auditors, and the National Association of Corporate Directors to launch the Anti-Fraud Collaboration in 2010. I'm pleased to say that the partnership between the four groups has been dynamic and productive.
This week, for example, the Anti-Fraud Collaboration released a report, The Fraud-Resistant Organization: Tools, Traits, and Techniques to Detect and Deter Financial Reporting Fraud. I commend the report to you, as it incorporates a wide body of research and is intended to serve as a resource for anyone involved in financial reporting. Among other things, The Fraud Resistant Organization takes a global view, drawing on research and in-depth roundtable discussions that have taken place recently in countries across the globe.
Another joint effort from the Anti-Fraud Collaboration: its series of case studies. These are a series of hypothetical fraud scenarios, which are based on the Harvard Business School case method. People using the case study start with a set of facts about a fictional company dealing with a fraud situation. With the guidance of an instructor, they then discuss what could have been done to address the situation.
Next Step: Communicating
Collaborating to gather and exchange insights is important. Equally important: conveying that knowledge and perspective with others far and wide. Thankfully, as the LinkedIn Influencer platform shows us so well, sharing information is as easy as it's ever been.
Along these lines, the Anti-Fraud Collaboration has teamed up to produce a series of free webcasts to leverage our collective expertise. One recent webcast, for example, focused on a key part of fraud deterrence and detection: whistleblower programs. I had the chance to moderate this fascinating discussion, which provided expert insights into how leading organizations create effective whistleblower programs, how they build awareness of them, and what steps they've you taken to mitigate the fear of retaliation. The webcast is available here.
Of course, no matter how many webcasts we hold or reports we publish, we'll never fully eradicate fraud. But if we foster understanding, if we work together, and if we share information widely, then we can reduce it one day to levels that won't be so astonishing.
Has your organization taken steps to fight fraud? Share in the comments, with any other thoughts on this topic.
A securities lawyer, Cindy Fornelli has served as the Executive Director of the Center for Audit Quality since its establishment in 2007.
Regulatory Executive
10 å¹´Excellent blog and link to other resources. Please continue the awareness campaign. Too often, we throw up our hands and proclaim fraud is part of our culture. Identifying tools to combat this will benefit us all.
Group Director at MITAS Global Limited | Global Authority in Traceability, Quality Control, Automation, and Vision Systems. Catalyzing Business Transformation with Advanced Quality Control and Operational Efficiency.
10 å¹´It starts and ends with people. People who do things to stop it, and people who are involved in the crime. No fence sitters here, because if you are not trying to stop it you are part of the problem. Its up to us wanting to stop it to find solutions to this problem. We are taking the battle of fakes, counterfeits and corruption to the criminals. Game on.
The CAQ is filling a genuine need by addressing the unique attributes of financial reporting fraud and providing practical steps to combat fraud.
Special Agent at FBI
10 å¹´Unfortunately, I don't think fraud will ever stop; it's been happening since the beginning of time. People think they can get away with stealing, and will continue to do so until they get caught (not all of them do). Greed, ego, desperation, etc., these human behaviors will always exist, and fraud stems from these behaviors. Harsher punishment and transaction authentication would definitely help, but there will always be someone out there who will attempt fraud because they think they're smarter than the guy who got caught.