OPINION: WHY ORGANIZATIONS MUST BE FRAUD AWARE.

Every year billions of shillings are lost through fraud. Many organizations have lost huge chunks of their revenue due to fraud perpetrated by employees and outsiders, and in worst-case scenarios, several organizations and parastatals have collapsed due to fraud and corruption.

What is fraud? Fraud is an economic crime and may be defined as any intentional illegal act characterized by deceit, concealment, or violation of trust resulting in loss or potential loss to the victim organization. It includes activities such as deception, theft, bribery, corruption, forgery, embezzlement, misappropriation, conspiracy, collusion, money laundering, extortion, misrepresentation, and concealment of material facts. Typically, fraud can be narrowed down to lying, stealing, and cheating.

Opportunity to commit fraud exists in all sectors. Fraud can occur in the public sector, NGOs, privately owned businesses, and in organizations that seek to contribute to the economic and social well-being of citizens, such as financial institutions. According to PwC Kenya Economic Crime and Fraud Survey (2020), 44% of Kenyan companies experienced fraud in the year 2020 and lost an accumulated amount of over Kshs 5 billion. That translates to a loss of over Ksh 13.7 million every day!

The perpetrators of fraud could be three-fold; internal perpetrators (from the Board of an organization, senior management, or operations staff) or external perpetrators (where customers/suppliers defraud organizations, or external attacks such as cybercrimes), or a joint effort where both internal and external parties collude. In Kenya and in Africa, it was reported that internal parties have been the most common perpetrators of fraud, which means that employees have committed most of the reported fraud. Therefore, organizations must be fraud aware in order to detect, prevent and respond to fraud.

Fraud affects both organizations and perpetrators in equal measure. Organizations suffer from loss of funds which leads to a low amount of resources available to do business, loss of investor confidence, negative media coverage, high cost of investigations, lack of new funding, and collapse of the business. It is estimated that organizations lose approximately 5% of revenue each year due to fraud and corruption (ACFE 2020 Report to the Nations). On the other hand, employees who are involved in fraud often lose their jobs and are prosecuted by victim organizations. People who commit fraud and/or are affected by?fraud?suffer from social problems such as loss of reputation, feelings of vulnerability and isolation and mental health problems, and depression.

With the devastating negative impacts of fraud on both organizations and individuals, the question that each institution and every person should try to answer is, how can they combat fraud? Organizations should have zero tolerance for fraud and gross misconduct. Adequate policies and procedures, enhanced internal controls, a code of conduct, and ethics should be put in place to discourage employees from committing fraud and to aid in fraud prevention and detection. According to the Association of Certified Fraud Examiners (ACFE), nearly 43% of all fraud cases are reported by a tip and 50% of the tips come from employees. This means that fraud prevention and detection is a collective responsibility. Policies such as whistleblowing policy are important and should be read and understood by all staff. Employees have an ultimate responsibility to report any actual or suspected case of non-compliance or fraud they come across in their day-to-day activities, and no staff should be victimized for reporting.

There are several fraud red flags that could indicate potential fraud schemes and employees should always be on the lookout. These include:

???????Employee lifestyle changes/living beyond means expensive house/home, clothes, and significant personal debt.

????????Behavioural changes: these may be an indication of drugs, alcohol, gambling, isolation from the team, or just fear of losing a job.

???????High employee turnover, particularly in areas where fraud is more prevalent.

???????Refusal to take vacation/leave or sick leave.

???????Lack of segregation of duties in the vulnerable area

???????Bank accounts that are not reconciled on a timely basis or discrepancies between bank deposits and posting.

???????Excessive number of year-end/month-end transactions or a high number of disbursements during the end month.

???????Reluctance to provide information to colleagues, supervisors, or auditors.

???????Missing files or documents

???????Domination of management decisions by an individual or few staff than required.

???????Staff display significant disrespect for procedures and seek policy exemptions.

In conclusion, fraud can be committed by anyone. Those who commit fraud are always motivated by financial pressure, the existence of an opportunity, and the justification of their illegal acts. The effects of fraud are enormous and several institutions in Kenya have collapsed due to mismanagement, fraud, and corruption. Fraud detection and prevention is a collective responsibility that requires the collective effort of all staff in an organization, government agencies, and the general public.